Are consumers Ricardian when some are liquidity constrained? Evidence for the United States

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This paper formulates and estimates a revised specification of Evans' (1988) test for Ricardian equivalence which incorporates the possible presence of liquidity constrained consumers. If liquidity constrained consumers are significant in number, tests using aggregate consumption data may tend to reject the Ricardian equivalence hypothesis when the model allows for liquidity constraints. A test which incorporated liquidity constrained consumers could not reject Ricardian equivalence over the sample period 1946-91. While the proportion of aggregate consumption which is liquidity constrained is found to be significant, it does not appear large enough to affect the test for Ricardian equivalence.

Document Type: Research Article


Publication date: June 1, 1997

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