TY  - JOUR
AU  - Chah,Eun Young
AU  - Ramey,Valerie A.
AU  - Starr,Ross M.
TI  - Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence From Durable Goods
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3907
PY  - 1991
Y2  - November 1991
UR  - http://www.nber.org/papers/w3907
L1  - http://www.nber.org/papers/w3907.pdf
N1  - Author contact info:
Valerie A. Ramey
Department of Economics, 0508
University of California, San Diego
9500 Gilman Drive
La Jolla, CA 92093-0508
Tel: 858/534-2388
Fax: 858/534-7040
E-Mail: VRAMEY@UCSD.EDU

Ross Starr
Department of Economics, D-0508
University of California, San Diego
9500 Gilman Drive
La Jolla, CA   92093-0508
Tel: 619-534-1055
E-Mail: rstarr@econ.ucsd.edu
AB  - This paper develops and tests a new set of stochastic implications of optimal consumption behavior in the presence of borrowing constraints. In a departure from previous models, the theory shows that liquidity constraints imply a distinctive intertemporal relationship between durable and nondurable good~ consumption. The presence of binding, liquidity constraints are manifested as part of an error correction term from the long-run cointegrating relationship between durables and nondurables. When liquidity constraints are binding, the error correction term will have predictive power for the future change in nondurable consumption. Empirical tests of the implications using aggregate data support the hypothesis that liquidity constraints, rather than rule-of-thumb behavior, best explain the excess sensitivity of consumption to predictable changes in income.
ER  -