Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105900
Authors: 
van Treeck, Till
Year of Publication: 
2008
Series/Report no.: 
IMK Working Paper 06/2008
Abstract: 
Various deviations from the Permanent Income consumption model with rational expectations have been discussed in the literature, including loss aversion and liquidity constraints. In the existing literature, these two types of consumption asymmetry are usually considered as mutually exclusive. Using a single data set for US personal consumption, income and wealth, we show that evidence of either loss aversion or liquidity constraints can indeed be produced, depending on the theoretical and econometric framework applied. We then propose a synthetic asymmetric error correction model and find evidence that can be interpreted as indicating both long-run loss aversion and short-run liquidity constraints. This result can also be interpreted in the context of the secular decline in the US personal savings rate over the past decades: although wealth declines can have considerable negative consumption effects in the short run, households have apparently been able, in the longer run, to substantially increase consumption expenditure following income and wealth increases, but to keep the necessary reductions in consumer spending, as a consequence of income and wealth declines, within relatively small limits. Yet, given increasing personal indebtedness, this asymmetric consumption pattern may be unsustainable
Subjects: 
Asymmetric error correction model
consumer economics
aggregate con-sumption and wealth.
JEL: 
C22
D11
D12
E21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.