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Non-linear adjustments on the excess sensitivity of consumption with liquidity constraints

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  • Dooyeon Cho
  • Dong-Eun Rhee

Abstract

This article investigates the role of domestic credit markets in explaining the excess sensitivity of private consumption to disposable income using heterogeneous panel data of 19 OECD countries over the last two decades. We find that the degree of the excess sensitivity has decreased as the liquidity constraints of households have been alleviated: the estimated time-varying coefficients for the marginal propensity to consume vary between 0.16 for the countries with low liquidity constraints and 0.38 for those with high liquidity constraints. We also provide evidence that the excess sensitivity has been more prominent after the global financial crisis in some advanced countries, such as Japan, Spain, and the United States, where sharp deleveraging of households has been ongoing.

Suggested Citation

  • Dooyeon Cho & Dong-Eun Rhee, 2017. "Non-linear adjustments on the excess sensitivity of consumption with liquidity constraints," Applied Economics, Taylor & Francis Journals, vol. 49(41), pages 4180-4187, September.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:41:p:4180-4187
    DOI: 10.1080/00036846.2016.1276279
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    Cited by:

    1. Samih A Azar, 2021. "Measuring the US marginal propensity to consume," Economics Bulletin, AccessEcon, vol. 41(2), pages 283-292.

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