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Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test

John Shea ()

Journal of Money, Credit and Banking, 1995, vol. 27, issue 3, 798-805

Abstract: This note conducts a simple test for myopia and liquidity constraints in aggregate U.S. consumption. The test exploits the fact that, under myopia, consumption should be equally sensitive to predictable income declines and increases, while under liquidity constraints consumption should be more sensitive to predictable income increases than to declines. Using quarterly postwar data, the author shows that aggregate consumption is in fact more sensitive to predictable income declines than increases. This 'perverse asymmetry' is inconsistent with both myopia and liquidity constraints but is qualitatively consistent with recent theoretical work incorporating loss aversion into intertemporal preferences. Copyright 1995 by Ohio State University Press.

Date: 1995
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Working Paper: Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test (1993)
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