Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation
JOURNAL OF MONEY, CREDIT, AND BANKING, Vol. 29, No. 2, May 1997
Posted: 5 Feb 1997
Most empirical studies on liquidity constraints classify a consumer as being constrained on the basis of a single indicator such as the asset to income ratio. In this analysis, we model the probability that a consumer faces liquidity constraints as a function of multiple social and economic factors. This probability function is estimated simultaneously with the degree of excess sensitivity of consumption to income in a switching regressions framework. The switching regressions apply optimal weights to the densities for the Euler equations in the two states and are less susceptible to sample misclassification. Our results based on data from the CEX confirm that liquidity constrained consumers are excessively sensitive to variables already known to economic agents. However, there is also evidence that the unconsistent with the theoretical predictions. Further analysis suggests that such behavior could be explained by time-non-separable preferences.
JEL Classification: D12, C23
Suggested Citation: Suggested Citation