Household heterogeneity and consumption dynamics in the presence of borrowing and liquidity constraints

Bruno Albuquerque

Applied Economics Letters, 2019, vol. 26, issue 6, 454-459

Abstract: I study the effects of borrowing and liquidity constraints on the response of consumption to anticipated income changes. Using the PSID over 1999–2013, I find that the well-documented strong excess sensitivity of consumption to income of highly constrained households can be explained by episodes of income increases. In addition, I look into the heterogeneity of households without debt, a group that has been largely disregarded by the literature. My fixed-effects estimates show that only those without debt tend to increase their saving in response to anticipated income declines, irrespective of the amount of liquid assets held.

Date: 2019
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DOI: 10.1080/13504851.2018.1486974

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