The Intertemporal Allocation of Consumption: Theory and Evidence

Abstract

Liquidity constraints and, more generally, imperfections in credit markets, can be extremely important for the interteinporal allocation of consumption and have received a substantial amount of attention in the theoretical and empirical literature on consumption. In the first part of the paper I review the reasons why liquidity constraints are important.Unfortunately, for several reasons, it is not easy to test for the presence of liquidity constraints. Aggregation issues preclude the use of aggregate time series data for such a purpose.Tests based on micro data, however, are complicated by some serious identification problems.If a simple equilibrium model does not fit some data set, one can change the assumptions about the opportunity set available to the economic agents or the specification of their preferences. For instance, empirical evidence that detects excess sensitivity of consumption to income could be explained by liquidity constraints or by non separability between consumption and leisure.However, the available evidence shows that it is possible to find flexible specifications of preferences that fit consumption movements at business cycle frequencies. I also present some simulation evidence that shows that for many plausible parameter configurations, liquidity consuaints are likely to be relevant only for a small proportion of economic agents.In the last part of the paper I present some new evidence on the relevance of liquidity constraints based on debt holding data. The data indicate that the demand for debt of individuals more likely to be liquidity constrained is less elastic to changes in the interest rate.

Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources

“…Section (Flavin, 1985; Hubbard and ee Galf (1990), Attanasio and Weber (1993), Goodfriend (1992), and Pischke (1995). Judd, 1986;Hayashi, 1987 (Browning, 1991; see also Attanasio, 1995, for discussion) 2 intertemporal dependence originating from the preference side has vastly different policy implications than credit constraints.…”

Investing Retirement Wealth: A Life-Cycle Model

“…The resulting income profiles are similar to those used in Attanasio (1995), Carroll and Summers (1991), and Gourinchas and Parker (1996). They are plotted in figure 11.1, along with the underlying age dummies for each of the three education groups.…”

“…To control for education, the sample is split into three groups: households without high school education, a second group with high school education but without a college degree, and, finally, college graduates. This sample split is intended to accommodate the well-established finding that age profiles differ in shape across education groups (Attanasio 1995;Hubbard, Skinner, and Zeldes 1994). For each education group, the function f (t, Z it ) is assumed to be additively separable in t and Z it .…”

Firm Investment in Imperfect Capital Markets: A Structural Estimation

“…Pratap (forthcoming) shows that this result is consistent with the presence of liquidity constraints when capital adjustment costs are non-convex. 3 See for example, Whited (1992) and Kwon (1994) for this result in US firm data in the manufacturing and retail sector respectively. Similar results have been obtained for firm level data in the U.K. (Bond & Meghir 1994) and Canada (Ng & Schaller 1996) and aggregate data in the U.S. (Gertler, Hubbard & Kashyap 1991 of firm investment.…”

“…Most studies find that the restriction is strongly rejected for firms which have been identified as constrained. 3 Although this method can circumvent the problems associated with the measurement of q, it suffers from some of the same drawbacks. The rejection of a null hypothesis of a specific investment model without liquidity constraints does not give us any information on what an alternative model should be.…”