Volume 24, Issue 3 (Autumn 2019)
JPBUD 2019, 24(3): 3-34 |
Back to browse issues page
1- Institute for Planning and Management Studies (IMPS), Tehran, Iran
2- Institute for Planning and Management Studies (IMPS), Tehran, Iran ,a.jalalin@imps.ac.ir
3- Monetary and Banking Research Institute (MBRI), Tehran, Iran.
2- Institute for Planning and Management Studies (IMPS), Tehran, Iran ,
3- Monetary and Banking Research Institute (MBRI), Tehran, Iran.
Abstract: (4563 Views)
In a rational expectation utility optimization model, the consumption profile is smoothed over time and, under some simplifying assumptions, it equals a constant fraction of total lifetime income. For this result to hold, the consumer must be able to transfer income from one period to another. Otherwise, the consumer is under liquidity constraints. The liquidity constraint affects the allocation of durable and non-durable consumption. We focus on the relationship between the marginal utility of household durable good stock and the marginal utility of non-durable consumption. When capital markets are perfect, the marginal utility of these two variables always bears an equilibrium relationship. But if liquidity constraints are binding, the difference between the lagged value of these two variables can predict the current growth change in non-durable consumption. We estimate the long-run relationship between these two variables using an error correction model and a pseudo-panel data set based on Iranian Household Expenditure and Income Surveys (HEIS). In the error correction model, the faster the error of the long-run relationship corrects, the lower the liquidity constraint. This coefficient is estimated to be statistically significant and is in [-0.22, -0.30] range in different estimates, thus we can reject the permanent-income hypothesis and accept that capital markets are not perfect in Iran.
Keywords: Consumption, Permanent-Income-Hypothesis, Liquidity Constraint, Error Correction Model, Pseudo-Panel, Durable Goods.
Type of Study: Research |
Subject:
Macroeconomics
Received: May 20 2020 | Accepted: Jul 08 2020 | ePublished: Sep 13 2020
Received: May 20 2020 | Accepted: Jul 08 2020 | ePublished: Sep 13 2020
References
1. Akekere, J., & Yousuo, P. (2012). Empirical Analysis of Change in Income on Private Consumption Expenditure in Nigeria from 1981 to 2010. International Journal of Academic Research in Business and Social Sciences, 2(11), 321-331.
2. Alessie, R., Devereux, M. P., & Weber, G. (1997). Intertemporal Consumption, Durables and Liquidity Constraints: A Cohort Analysis. European Economic Review, 41(1), 37-59. [DOI:10.1016/0014-2921(95)00128-X]
3. Anderson, T. W., & Hsiao, C. (1982). Formulation and Estimation of Dynamic Models Using Panel Data. Journal of Econometrics, 18(1), 47-82. [DOI:10.1016/0304-4076(82)90095-1]
4. Baxter, M. (1996). Are Consumer Durables Important for Business Cycles? The Review of Economics and Statistics, 78(1), 147-155. [DOI:10.2307/2109854]
5. Bilson, J. F. (1980). The Rational Expectations Approach to the Consumption Function: A Multi-Country Study. European Economic Review, 13(3), 273-299. [DOI:10.1016/0014-2921(80)90002-1]
6. Blundell, R., Browning, M., & Meghir, C. (1994). Consumer Demand and the Life-Cycle Allocation of Household Expenditures. The Review of Economic Studies, 61(1), 57-80. [DOI:10.2307/2297877]
7. Blundell-Wignall, A., Browne, F., & Manasse, P. (1990). Monetary Policy in Liberalised Financial Markets. OECD Economic Studies, 10(15), 145-178.
8. Breitung, J. (1999). The Local Power of Some Unit Root Tests for Panel Data. Discussion Paper, No. 69.
9. Chah, E. Y., Ramey, V. A., & Starr, R. M. (1995). Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods. Journal of Money, Credit and Banking, 27(1), 272-287. [DOI:10.2307/2077863]
10. Deaton, A. (1985). Panel Data from Time Series of Cross-Sections. Journal of Econometrics, 30(1-2), 109-126. [DOI:10.1016/0304-4076(85)90134-4]
11. Deaton, A. (1997). The Analysis of Household Surveys: A Microeconometric Approach to Development Policy: The World Bank. [DOI:10.1596/0-8018-5254-4]
12. Derakhshan, M. (2012). Properties of Optimal Consumption under Liquidity Constraints: New Results by Control Theoretic Approach. Iranian Journal of Economic Research. 17(50), 1-42.
13. Duesenberry, J. S. (1949). Income, Saving, and the Theory of Consumer Behavior. Cambridge: Harvard University Press.
14. Einian, M., & Nili, M. (2020). Excess Sensitivity and Borrowing Constraints: Evidence from Iranian Households. Economics of Transition and Institutional Change, 28(1), 137-160. [DOI:10.1111/ecot.12233]
15. Engle, R. F., & Granger, C. W. (1987). Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica: Journal of the Econometric Society, 55(2), 251-276. [DOI:10.2307/1913236]
16. Fisher, I. (1932). Booms and Depressions: Some First Principles: Adelphi Company New York.
17. Flavin, M. A. (1981). The Adjustment of Consumption to Changing Expectations about Future Income. Journal of Political Economy, 89(5), 974-1009. [DOI:10.1086/261016]
18. Flavin, M. A. (1984). Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia? National Bureau of Economic Research, No. 1341. [DOI:10.3386/w1341]
19. Friedman, M. (1957). A Theory of the Consumption Function. New York: Princeton University Press. [DOI:10.1515/9780691188485]
20. Gomes, F. A. R., & Paz, L. S. (2010). Consumption in South America: Myopia or Liquidity Constraints? Economia Aplicada, 14(2), 129-145. [DOI:10.1590/S1413-80502010000200001]
21. Habibullah, M. S., Smith, P., & Azman-Saini, W. (2006). Testing Liquidity Constraints in 10 Asian Developing Countries: An Error-Correction Model Approach. Applied Economics, 38(21), 2535-2543. [DOI:10.1080/00036840500427833]
22. Hadri, K. (2000). Testing for Stationarity in Heterogeneous Panel Data. The Econometrics Journal, 3(2), 148-161. [DOI:10.1111/1368-423X.00043]
23. Hall, R. E. (1978). Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence. Journal of Political Economy, 86(6), 971-987. [DOI:10.1086/260724]
24. Hall, R. E., & Mishkin, F. S. (1980). The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households. National Bureau of Economic Research, No. 505. [DOI:10.3386/w0505]
25. Hansen, L. P., & Singleton, K. J. (1983). Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns. Journal of Political Economy, 91(2), 249-265. [DOI:10.1086/261141]
26. Hayashi, F. (1982). The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables. Journal of Political Economy, 90(5), 895-916. [DOI:10.1086/261100]
27. Hayashi, F. (1985). Tests for Liquidity Constraints: A Critical Survey. National Bureau of Economic Research, No. 1720. [DOI:10.3386/w1720]
28. Hubbard, R. G., Judd, K. L., Hall, R. E., & Summers, L. (1986). Liquidity Constraints, Fiscal Policy, and Consumption. Brookings Papers on Economic Activity, 1986(1), 1-59. [DOI:10.2307/2534413]
29. Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for Unit Roots in Heterogeneous Panels. Journal of Econometrics, 115(1), 53-74. [DOI:10.1016/S0304-4076(03)00092-7]
30. Jaffee, D., & Stiglitz, J. (1990). Credit Rationing. Handbook of Monetary Economics, 2(1), 837-888. [DOI:10.1016/S1573-4498(05)80023-2]
31. Jappelli, T. (1990). Who Is Credit Constrained in the US Economy? The Quarterly Journal of Economics, 105(1), 219-234. [DOI:10.2307/2937826]
32. Judson, R. A., & Owen, A. L. (1999). Estimating Dynamic Panel Data Models: A Guide for Macroeconomists. Economics Letters, 65(1), 9-15. [DOI:10.1016/S0165-1765(99)00130-5]
33. Kao, C. (1999). Spurious Regression and Residual-Based Tests for Cointegration in Panel Data. Journal of Econometrics, 90(1), 1-44. [DOI:10.1016/S0304-4076(98)00023-2]
34. Kao, C., & Chiang, M.-H. (2000). On the Estimation and Inference of a Cointegrated Regression in Panel Data. En: Nonstationary Panels, Panel Cointegration and Dynamic Panels, 15, 179-222: Elsevier Science Inc. [DOI:10.1016/S0731-9053(00)15007-8]
35. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. New York: Harcourt, Brace.
36. Khan, K., & Nishat, M. (2011). Permanent Income Hypothesis, Myopia and Liquidity Constraints: A Case Study of Pakistan. Pakistan Journal of Social Sciences (PJSS), 31(2), 299-307.
37. Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties. Journal of Econometrics, 108(1), 1-24. [DOI:10.1016/S0304-4076(01)00098-7]
38. Lunfang, D., Khan, K., Khan, I., & Khan, N. (2018). Testing the Empirical Validity of Permanent Income Hypothesis and Absolute Income Hypothesis for China. The Empirical Economics Letters, 17(4), 453-460.
39. Manitsaris, A. (2006). Estimating the European :union: Consumption Function under the Permanent Income Hypothesis. International Research Journal of Finance and Economics, 2(3), 1450-2887.
40. Mankiw, N. G., & Shapiro, M. D. (1985). Trends, Random Walks, and Tests of the Permanent Income Hypothesis. Journal of Monetary Economics, 16(2), 165-174. [DOI:10.1016/0304-3932(85)90028-5]
41. Mariger, R. P. (1986). Consumption Behavior and the Effects of Government Fiscal Policies: Harvard University Press.
42. Modigliani, F., & Brumberg, R. (1954). Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data. Franco Modigliani, 1(1), 388-436.
43. Nwala, K. (2010). Does Permanent Income Hypothesis Hold for Some Selected African Countries? Empirical Evidence. African Journal of Business and Economic Research, 5(2_3), 27-43.
44. Ofwona, A. C. (2013). An Estimation of the Consumption Function for Kenya Using Keynes' Absolute Income Hypothesis for the Period 1992-2011. Journal of Emerging Trends in Economics and Management Sciences, 4(1), 103-105.
45. Osei-Fosu, A. K., Butu, M. M., & Osei-Fosu, A. K. (2014). Does Ghanaian's Consumption Function Follow the Permanent Income Hypothesis? The Cagan's Adaptive Expectation Approach. ADRRI Journal (Multidisciplinary), 4(4), 133-148.
46. Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-670. [DOI:10.1111/1468-0084.61.s1.14]
47. Pissarides, C. A. (1978). Liquidity Considerations in the Theory of Consumption. The Quarterly Journal of Economics, 92(2), 279-296. [DOI:10.2307/1884163]
48. Romer, D. (2012). Macroeconomics Advanced (Vol. 1). Ed. McGraw-Hill Irvin. Cap: New York.
49. Runkle, D. E. (1991). Liquidity Constraints and the Permanent-Income Hypothesis: Evidence from Panel Data. Journal of Monetary Economics, 27(1), 73-98. [DOI:10.1016/0304-3932(91)90005-9]
50. Salehi-Isfahani, D., & Marku, M. (2011). Reversal of Fortunes: The Rise and Fall of Lifetime Earnings of Iranian Men. Economic Development and Cultural Change, 59(4), 877-906. [DOI:10.1086/649896]
51. Shea, J. (1995). Myopia, Liquidity Constraints, and Aggregate Consumption: A Simple Test. Journal of Money, Credit and Banking, 27(3), 798-805. [DOI:10.2307/2077751]
52. Tobin, J. (1951). Relative Income, Absolute Income, and Savings, in Money, Trade, and Economic Growth, in Honor of John Henry Williams: New York: Macmillan Co.
53. Verbeek, M. (2008). Pseudo-Panels and Repeated Cross-Sections the Econometrics of Panel Data (pp. 369-383): Springer. [DOI:10.1007/978-3-540-75892-1_11]
54. Wachtel, P. (1989). Macroeconomics: From Theory to Practice: McGraw-Hill College.
55. Westerlund, J. (2007). Testing for Error Correction in Panel Data. Oxford Bulletin of Economics and Statistics, 69(6), 709-748. [DOI:10.1111/j.1468-0084.2007.00477.x]
56. Zeldes, S. P. (1989). Consumption and Liquidity Constraints: An Empirical Investigation. Journal of Political Economy, 97(2), 305-346. [DOI:10.1086/261605]
| Rights and permissions | |
.jpg) |
This work is licensed under a Creative Commons Attribution 4.0 International License. |