Tests for Liquidity Constraints: A Critical Survey

Fumio Hayashi

125 citations0/0 files storedNational Bureau of Economic Research

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Financial Literacy, Pension, Retirement Analysis Monetary Policy and Economic Impact Economic theories and models

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.

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References

1978Asset Prices in an Exchange Economy 1976Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information 1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1989Consumption and Liquidity Constraints: An Empirical Investigation 1976Imperfect Information, Uncertainty, and Credit Rationing 1981The Adjustment of Consumption to Changing Expectations About Future Income 1977A model of insurance markets with incomplete information 1982The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households

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