Economic Research and Perspectives

Economic Research and Perspectives

Excess Sensitivity Analysis of Household Consumption and Liquidity Constraint: Case of Iran

Document Type : Original Research

Authors
Hassan Dargahi 1
maryam mohammadzadeh 2
1 Associate Professor of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University
2 M.A. in Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University
Abstract
Households need to have a smooth level of consumption in order to maximize their utility. Among the factors influencing consumption smoothing are: the existence of a perfect capital market, lack of liquidity constraints and access to financial resources, so that individuals are able to borrow and lend in order to prevent their income and consumption fluctuations. This paper attempts to investigate the excess sensitivity of household consumption with emphasis on liquidity constraints in Iran using panel data related to two recessionary periods of 2013-2015 and the pre-recessionary period of 2010-2012. The results show that the excess sensitivity of consumption to current income is significant. This finding rejects the permanent income hypothesis based on rational expectations in Iran. The asymmetric impacts of the positive and negative growth rates of income on consumption confirm the liquidity constraints of households. Identification of the socioeconomic characteristics of households with higher sensitivity, especially during the recession of 2013-2014, suggests that households without access to or inadequate access to bank loans, the elderly-headed households, families headed by non-governmental employees, low-income and rural households are more sensitive to income in comparison to the other households.
Keywords
Excess sensitivity
Permanent income hypothesis
Consumption smoothing
Liquidity constraint
Household budget survey

Subjects

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Economic Research and Perspectives
Volume 19, Issue 3
Autumn 2019
Pages 61-84