Determinants of consumption smoothing

Gert Peersman () and L. Pozzi ()
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L. Pozzi: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: As is generally acknowledged, the failure of the perfect credit markets assumption underlying the permanent income hypothesis may be responsible for low consumption smoothing and observed excess sensitivity of consumption to current income. The economic literature puts forward a number of potential determinants of liquidity constraints. In this paper we investigate the relevance of these determinants by looking at their impact on household consumption smoothing. Applying a Kalman filter to a state-space version of our model, we find that excess sensitivity in the US is higher in recessions and depends positively on government debt and negatively on financial liberalization.

Keywords: Private consumption; liquidity constraints; consumption smoothing; excess sensitivity; Kalman filter; state-space models. (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2004-02
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:04/231

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