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Intertemporal substitution in consumption : evidence for some high- and middle-income countries

  • Pedersen, Karsten N.
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    This paper attempts to find support for the life-cycle model of consumption under the assumption that some consumers are excluded from the credit market. An intertemporal model of consumption is put forward that allows a fraction of consumers to be credit rationed. The model defines credit rationing as the constraints on consumption created by lack of access to credit markets. If consumers are unable to borrow against human wealth and have no financial wealth, consumption is bound to current income. In particular, the role of quantitative instruments applied by monetary authorities and the evolution of financial markets are examined. Hence, the fraction of consumers that are rationed is allowed to change over time. The model is estimated using annual data for Brazil, Germany, Japan, Korea, Malaysia and the United States. Three"middle-income"developing countries are used to see if there is support for the life-cycle model of consumption in less developed economies. For comparative purposes three high-income countries with high quality data are also investigated. Throughout the examination it is assumed that expectations are formed rationally. This report briefly summarizes the results of a number of earlier empirical studies, and develops the regression model from the life-cycle model of consumption, with and without credit constraints.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 641.

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    Date of creation: 30 Apr 1991
    Date of revision:
    Handle: RePEc:wbk:wbrwps:641
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    1. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    2. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
    3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
    4. Erkki Koskela, 1978. "On the Theory of Consumption Function with Borrowing Constraints," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 114(IV), pages 739-752, December.
    5. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
    6. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
    7. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
    8. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
    9. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
    10. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc.
    11. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
    12. Olli-Pekka Lehmussaari, 1990. "Deregulation and Consumption: Saving Dynamics in the Nordic Countries," IMF Staff Papers, Palgrave Macmillan, vol. 37(1), pages 71-93, March.
    13. repec:fth:harver:1435 is not listed on IDEAS
    14. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    15. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
    16. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
    17. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1982. "Intertemporal Substitution in Macroeconomics," NBER Working Papers 0898, National Bureau of Economic Research, Inc.
    18. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
    19. Fumio Hayashi, 1984. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," NBER Working Papers 1305, National Bureau of Economic Research, Inc.
    20. Koskela, Erkki & Viren, Matti, 1984. "Credit Rationing and Consumer Intertemporal Choice," Oxford Economic Papers, Oxford University Press, vol. 36(2), pages 241-47, June.
    21. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
    22. John Y. Campbell & Richard H. Clarida, 1987. "Household Saving and Permanent Income in Canada and the United Kingdom," NBER Working Papers 2223, National Bureau of Economic Research, Inc.
    23. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
    24. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    25. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
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