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Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test

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  • Shea, J.

Abstract

This note conducts a simple test for myopia and liquidity constraints in aggregate U.S. consumption. The test exploits the fact that, under myopia, consumption should be equally sensitive to predictable income declines and increases, while under liquidity constraints consumption should be more sensitive to predictable income increases than to declines. Using quarterly postwar data, the author shows that aggregate consumption is in fact more sensitive to predictable income declines than increases. This 'perverse asymmetry' is inconsistent with both myopia and liquidity constraints but is qualitatively consistent with recent theoretical work incorporating loss aversion into intertemporal preferences. Copyright 1995 by Ohio State University Press.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Shea, J., 1993. "Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test," Working papers 9305, Wisconsin Madison - Social Systems.
    • Handle: RePEc:att:wimass:9305
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    consumption;

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