Finance Papers

Document Type

Journal Article

Date of this Version

6-1997

Publication Source

European Economic Review

Volume

41

Issue

6

Start Page

1079

Last Page

1109

DOI

10.1016/S0014-2921(97)00056-1

Abstract

In this paper, I empirically examine consumption smoothing behavior across a broad group of countries using a unique data set that indicates whether residents in a country face an official government restriction. I then ask whether the ex ante consumption movements among restricted countries differ from those of unrestricted countries. To gauge the departure from standard consumption smoothing, I use the Campbell and Mankiw (‘Consumption income, and interest rates: Reinterpreting the time series evidence’, In: O.J. Blanchard and S. Fischer, eds., NBER macroeconomics annual, 1989 (MIT Press, Cambridge, MA, 1989) and ‘The response of consumption to income: A cross-country investigation’ European Economic Review 35, 723–756, 1991) approach of regressing consumption growth on income growth and instrumenting with lagged variables. Interestingly, I find that consumption growth for residents in countries that impose international restrictions have a significantly higher coefficient on income growth than do residents in countries without those restrictions. Thus, a greater proportion of consumers facing international restrictions appear to act as though they are liquidity constrained according to the Campbell and Mankiw approach. I also discuss alternative interpretations that do not depend upon liquidity constraints.

Copyright/Permission Statement

© 1997. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

consumption behavior, output growth, international restrictions

Embargo Date

6-10-1999

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Date Posted: 27 November 2017

This document has been peer reviewed.