Liquidity constraints and the permanent-income hypothesis: Evidence from panel data

Abstract Several recent studies have rejected the permanent-income hypothesis using aggregate time-series data. One explanation for this rejection is that some households are liquidity-constrained. This study directly tests for liquidity constraints using panel data on individual households. It finds no evidence of liquidity constraints and suggests that the failure of the permanent-income hypothesis in aggregate data may be due to aggregation bias. The paper also contains an extended discussion of econometric methods for panel-data rational-expectations models.

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