Economics, Econometrics and Finance
4 years ago

Liquidity constraints drive excessive spending, impacting economic stability and growth.

RePEc: Research Papers in Economics
Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?
Marjorie Flavin

Paper Summary

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The study investigates why people tend to spend more when they earn more, even if it's temporary. It tests whether this behavior is due to limited access to borrowing money or short-term thinking. By analyzing data on unemployment rates, the researchers found that people facing financial constraints tend to spend more of their extra income. This suggests that not being able to borrow easily plays a big role in why people spend more when they earn more.