NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do Borrowing Constraints Matter? An Analysis of Why the Permanent Income Hypothesis Does Not Apply in Japan

Miki Kohara, Charles Yuji Horioka

NBER Working Paper No. 12330
Issued in June 2006
NBER Program(s):   EFG

We use micro data on young married households from the Japanese Panel Survey of Consumers in order to analyze the importance of borrowing constraints in Japan. We find (1) that 8 to 15 percent of young married Japanese households are borrowing-constrained, (2) that household assets and the husband’s educational attainment are the most important determinants of whether or not a household is borrowing-constrained, and (3) that the Euler equation implication is rejected for both the full sample and for the subsample of unconstrained households. These results suggest that the life cycle/permanent income hypothesis does not apply in Japan and that the presence of borrowing constraints is not the main reason why it does not apply.

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Document Object Identifier (DOI): 10.3386/w12330

Published: Kohara, Miki & Horioka, Charles Yuji, 2006. "Do borrowing constraints matter? An analysis of why the permanent income hypothesis does not apply in Japan," Japan and the World Economy, Elsevier, vol. 18(4), pages 358-377, December.

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