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Are countries with official international restrictions ‘liquidity constrained’?

Authors
Journal
European Economic Review
0014-2921
Publisher
Elsevier
Publication Date
Volume
41
Issue
6
Identifiers
DOI: 10.1016/s0014-2921(97)00056-1
Keywords
  • Consumption Behavior
  • Output Growth
  • International Restrictions
Disciplines
  • Economics
  • Political Science

Abstract

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.

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