Liquidity constraints versus loss aversion in household consumption: a simple reconciliation

Till van Treeck

No 13-2010, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth for the period 1953q1-2007q3, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then apply a synthetic asymmetric error correction model that distinguishes short-run and long-run asymmetries and helps reconcile the conflicting results from the previous literature. Our findings can also be interpreted in the context of the secular decline in the US personal savings rate before the outbreak of the financial crisis in 2007.

Keywords: Asymmetric error correction model; consumer economics; aggregate consumption and wealth (search for similar items in EconPapers)
JEL-codes: C22 D11 D12 E21 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2010
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.boeckler.de/pdf/p_imk_wp_13_2010.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:13-2010

Access Statistics for this paper

More papers in IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute Contact information at EDIRC.
Bibliographic data for series maintained by Sabine Nemitz ().