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Irish Consumption: Evidence of Capital Market Imperfections

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  • Maurice Roche

Abstract

In this paper we ask why was there a consumption boom in Ireland in the late 1980s? We put forward an expalnation, namely, that worsening borrowing conditions led agents to conume more out of disposable income. We explicityly model the economy as consisting of two types of consumers. One type are creditors who behave in a standard fashion. the other type are borrowers who are liquidity constrained. We assume that the second type face a schedule of loan interest rates as an increasing function of amount of the loan. This permits a differential in the borrowing and lending rates. Our results suggest that consumption became more responsive to the growth of disposable labour income at a time when borrowing conditions worsened.

Suggested Citation

  • Maurice Roche, 1994. "Irish Consumption: Evidence of Capital Market Imperfections," Economics Department Working Paper Series n530694, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n530694
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    Keywords

    CONSUMPTION; FINANCIAL MARKET;

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