LIQUIDITY CONSTRAINTS AND THE PERMANENT-INCOME HYPOTHESIS - EVIDENCE FROM PANEL DATA

Several recent studies have rejected the permanent-income hypothesis using aggregate time-series data. One explanation for this rejection is that some households are liquidity-constrained. This study directly tests for liquidity constraints using panel data on individual households. It finds no evidence of liquidity constraints and suggests that the failure of the permanent-income hypothesis in aggregate data may be due to aggregation bias. The paper also contains an extended discussion of econometric methods for panel-data rational-expectations models. © 1991.