Non-linear adjustments on the excess sensitivity of consumption with liquidity constraints

Dooyeon Cho, Dong Eun Rhee

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    1 Citation (Scopus)

    Abstract

    This article investigates the role of domestic credit markets in explaining the excess sensitivity of private consumption to disposable income using heterogeneous panel data of 19 OECD countries over the last two decades. We find that the degree of the excess sensitivity has decreased as the liquidity constraints of households have been alleviated: the estimated time-varying coefficients for the marginal propensity to consume vary between 0.16 for the countries with low liquidity constraints and 0.38 for those with high liquidity constraints. We also provide evidence that the excess sensitivity has been more prominent after the global financial crisis in some advanced countries, such as Japan, Spain, and the United States, where sharp deleveraging of households has been ongoing.

    Original languageEnglish
    Pages (from-to)4180-4187
    Number of pages8
    JournalApplied Economics
    Volume49
    Issue number41
    DOIs
    Publication statusPublished - 2017 Sept 2

    Bibliographical note

    Funding Information:
    Dooyeon Cho gratefully acknowledges that this work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A8017657).​​​​​

    Publisher Copyright:
    © 2017 Informa UK Limited, trading as Taylor & Francis Group.

    Keywords

    • Private consumption
    • excess sensitivity
    • liquidity constraints
    • non-linearity
    • permanent income hypothesis

    ASJC Scopus subject areas

    • Economics and Econometrics

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