The Korean Journal of Economic Studies
Asymmetry in Consumption Responses and Liquidity Constraint
Kangwoo Park (Korea National Open University) and Youngseon Seo (Korea Development InstituteYear 2015Vol. 63No. 3
Abstract
Employing Korean aggregate and household panel data, we examine theasymmetry in household’s consumption responses to income changes, andinvestigates whether the presence of liquidity constraint can explain thisasymmetry as predicted by existing theories. Testing the presence ofasymmetry in consumption responses, we find that in both aggregate andhousehold panel data, consumption decreases more significantly in response toan income decrease than it increases in response to an income increase of thesame magnitude. When we split the households sample intoliquidity-constrained and unconstrained sub-groups, the asymmetry inconsumption responses is more prominent in the liquidity-constrained group.Applying Shea(1995a) model to household panel data, we find that thesub-group results support the liquidity constraint hypothesis as a convincingexplanation for the asymmetric responses of consumption.