The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis

Fumio Hayashi

The Quarterly Journal of Economics, 1985, vol. 100, issue 1, 183-206

Abstract: This paper examines the effect of liquidity constraints on consumption expenditures using a single-year cross-section data set. A reduced-form equation for consumption is estimated on high-saving households by the Tobit procedure to account for the selectivity bias. Since high-saving households are not likely to be liquidity constrained, the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross-section data. When the reduced-form equation is used to predict desired consumption, the gap between desired consumption and measured consumption is most evident for young households.

Date: 1985
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Working Paper: The Effect of Liquidity Constraints on Consumption: A Cross-Sectional Analysis (1982)
Working Paper: The Effect of Liquidity Constraints on Consumption: Cross-Sectional Analysis (1982)
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