Consumption and Liquidity Constraints: An Empirical Investigation
Adobe Acrobat PDF
Several recent studies have suggested that empirical rejections of the permanent income/life cycle model might be due to the existence of liquidity constraints. This paper tests the permanent income hypothesis against the alternative hypothesis that consumers optimize subject to a well-specified sequence of borrowing constraints. Implications for consumption in the presence of borrowing constraints are derived and then tested using time-series/cross-section data on families from the Panel Study of Income Dynamics. The results generally support the hypothesis that an inability to borrow against future labor income affects the consumption of a significant portion of the population.
Source: Journal of Political Economy
Zeldes, Stephen. "Consumption and Liquidity Constraints: An Empirical Investigation." Journal of Political Economy 97, no. 2 (April 1989): 305-46.