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

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 liquidi...

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Bibliographic Details
Published in:Applied economics 2017-09, Vol.49 (41), p.4180-4187
Main Authors: Cho, Dooyeon, Rhee, Dong-Eun
Format: Article
Language:English
Subjects:
Consumption
Consumption function
Disposable income
Economic analysis
Economic crisis
Economic models
Economic theory
excess sensitivity
Households
Liquidity
liquidity constraints
Markets
non-linearity
Panel data
permanent income hypothesis
Private consumption
Propensity to consume
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Summary: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.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2016.1276279