We propose a method to test for liquidity constraints which relies on using the within period marginal rate of substitution condition as a benchmark to evaluate the intertemporal Euler equation. If spot markets for nondurable goods exist, but financial markets either do not exist, or are imperfect, we show how the comparison of first order conditions involving the relevant spot and intertemporal prices can be used to detect the imperfection. We apply our methodology to a large sample of U.S. households, drawn from twelve years of the Consumer Expenditure Survey, allowing for a general nonseparable preference structure. Our estimates of first order conditions do not indicate the presence of liquidity constraints, with the possible exception of young households.
Authors
Research Fellow Yale University
Costas is a Research Fellow of the IFS and a Professor of Economics at Yale University and a Visiting Professor at University College London.
Research Associate University of Padua
Guglielmo is a Research Associate at the IFS and Professor in the Department of Economics at the Faculty of Statistics, Padua University.
Journal article details
- Publisher
- The Econometric Society
- Issue
- September 1996
Suggested citation
Meghir, C and Weber, G. (1996). 'Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis using a U.S. Consumption Panel' (1996)
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