Re-testing liquidity constraints in ten Asian developing countries

Re-testing liquidity constraints in ten Asian developing countries


Kuan-Min Wang, Yuan-Ming Lee


Keywords: business cycle, liquidity constraints, permanent income hypothesis, threshold model


Summary: This paper suggests that the strength or weakness of the economy can affect short-run consumption and consumer borrowing in the credit markets, and that these behavioural changes are key factors determining liquidity constraints. A nonlinear threshold model is developed, with the threshold variable of the real GDP growth dividing the model into two regimes: strong economy and weak economy. The model is used to test again for liquidity constraints on consumers in the ten Asian countries analyzed in Habibullah et al. (2006). Of the ten countries, seven are found to exhibit nonlinearity in their consumption data. This confirms that levels of economic growth affect the proportion of consumers who are liquidity-constrained. Weak economic growth is found to be associated with higher levels of liquidity constraints, and strong economic growth with lower levels of constraints.



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