How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data

Umar Faruqui and Samah Torchani

Discussion Papers from Bank of Canada

Abstract: Using a unique micro-dataset containing real and financial information on Canadian households for 2000–07, the authors address two questions: (1) What is the proportion of households whose consumption displays excess sensitivity to income, and who are likely liquidity constrained? (2) Do house prices affect the ability of Canadian households to smooth their consumption? The authors find that, on average (over the 2000–07 period), about 23 per cent of households in Canada were constrained. Their results suggest that young households with fewer liquid assets, higher education and lower home equity, as well as those that are unmarried, are more likely to be liquidity constrained than other households. The authors’ results also suggest that larger housing equity tends to facilitate consumption smoothing for households in Canada. This provides empirical evidence of a collateral channel linking house prices and consumption.

Keywords: Economic models; Sectoral balance sheet (search for similar items in EconPapers)
JEL-codes: C35 D12 D30 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2012
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (3)

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