Testing for Liquidity Constraints among Households: An International Analysis

Manouchehr Mokhtari

Empirical Economics, 1994, vol. 19, issue 4, 709-15

Abstract: A testable implication for optimizing households minimizing a dynamic loss function but encountering borrowing constraints is forwarded. It is argued that in an error correction model of consumers' expenditures, an asymmetric reaction by households to disequilibrium error reveals the presence of borrowing constraints in the market. A test of this implication for the 11 OECD countries shows that significant liquidity constraints are present for most countries. The proposed setup can be used to test the previously maintained assumption of symmetric reactions to disequilibrium errors in the ECM models.

Date: 1994
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