Excess sensitivity of consumption, liquidity constraints, and mandatory saving

Cheolbeom Park and Pei Fang Lim

Applied Economics Letters, 2004, vol. 11, issue 12, 771-774

Abstract: Using Singapore mandatory saving system, it is examined whether liquidity constraint is a major reason for the excess-sensitivity of consumption to predictable income growth. Although the mandatory saving rate for employees could be a good measure for the financial condition of a liquidity-constrained consumer, it is found, through the nonlinear instrumental variable estimation, that consumption growth is not sensitive to changes in the mandatory saving rate for employees. This finding suggests that liquidity constraints would not be a major reason for the excess-sensitivity puzzle.

Date: 2004
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DOI: 10.1080/1350485042000240101

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