Intertemporal nonseparability or borrowing restrictions? A disaggregate analysis using a US consumption panel

We propose a method to test for liquidity constraints which relies on using the within period marginal rate of substitution condition as a benchmark to evaluate the intertemporal Euler equation. If spot markets for nondurable goods exist, but financial markets either do not exist, or are imperfect, we show how the comparison of first order conditions involving the relevant spot and intertemporal prices can be used to detect the imperfection. We apply our methodology to a large sample of U.S. households, drawn from twelve years of the Consumer Expenditure Survey, allowing for a general nonseparable preference structure. Our estimates of first order conditions do not indicate the presence of liquidity constraints, with the possible exception of young households.