Working Paper: NBER ID: w1720
Authors: Fumio Hayashi
Abstract: This paper surveys recent empirical work on tests for liquidity constraints.The focus of the survey is on the tests based on the Euler equation. After examining the technical aspects of the recent tests on aggregate time-series data and on micro data, the survey tries to evaluate their economic significance. The paper concludes that for a significant fraction of the population the behavior of consumption over time is affected in away predicted by credit rationing and differential borrowing and lending rates. However, the available evidence is shown to have failed in providing information necessary to calculate the response of consumption to changes in the time profile of income.The paper attributes the failure to the fact that not much attention in the literature has been paid to the cause of liquidity constraints.
Keywords: liquidity constraints; consumption; Euler equation; intertemporal optimization
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints (E41) | consumption behavior (D10) |
| liquidity constraints (E41) | sensitivity of consumption to current income changes (D12) |
| binding liquidity constraints (E51) | negative correlation between marginal rate of substitution and wealth/income variables (D11) |
| liquidity constraints (E41) | divergence from traditional intertemporal optimization predictions (D15) |
| credit rationing (G21) | consumption behavior (D10) |
| differential borrowing and lending rates (E43) | consumption behavior (D10) |