As is generally acknowledged, the failure of the perfect credit markets assumption underlying the permanent income hypothesis may be responsible for low consumption smoothing and observed excess sensitivity of consumption to current income. The economic literature puts forward a number of potential determinants of liquidity constraints. In this paper we investigate the relevance of these determinants by looking at their impact on household consumption smoothing. Applying a Kalman filter to a state-space version of our model, we find that excess sensitivity in the US is higher in recessions and depends positively on government debt and negatively on financial liberalization.
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.