Aggregate Consumption Behaviour and Liquidity Constraints: The Canadian Evidence
Canadian Journal of Economics, Vol. 28, No. 4b, pp. 1135-115, November 1995
Posted: 31 Mar 2013
Date Written: 1995
This paper considers a general permanent-income model in which a fraction of consumers in the economy is liquidity constrained. Consumption growth rate for these individuals is related to the growth rate of their income and the level of real interest rates. The interest-rate coefficient is predicted to be smaller in the presence of liquidity constraints. Empirically, liquidity constraints are found to be important, and the estimated intertemporal elasticity of substitution parameter is much larger than the one obtained by estimating the standard representative agent model. Lastly, there is some evidence of structural changes over the sample period, which are associated with the 1982 recession.
Keywords: Asset Pricing, Consumption, Permanent Income, Current Income, Liquidity Constraint, Generalized Method of Moments
JEL Classification: C13, C22, C32, C52, D91, G12, E21
Suggested Citation: Suggested Citation