If some consumers are liquidity-constrained, aggregate consumption should be ‘excessively sensitive’ to credit conditions as well as to income. Moreover, the ‘excess sensitivity’ may vary over time. Using data for Canada, France, Japan, the United Kingdom and the United States, we find a substantial impact of credit aggregates on consumption in all countries considered. Moreover, the borrowing/lending wedge is a significant determinant of consumption in Canada, Japan and the United States. Using extended Kalman filtering techniques, we show that excess sensitivity varies over time, with a clear tendency to decline in the United States.
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