2019

Einian, Majid; Nili, Masoud

In contrast to the findings of simple rational expectations permanent income hypothesis models, empirical studies show that income changes can help predict consumption change. This is dubbed as excess sensitivity in the macroeconomic literature. We use Iranian household data to investigate the excess sensitivity using civil servant status as a proxy for borrowing constraints. We observe that the excess sensitivity is different among different panels. Much less excess sensitivity is observed for government employees who have better access to finance due to the structure of the labour market and banking system in Iran. Our proxy variable to divide data, which is the working status of the head of the household, does not suffer from endogeneity problems evident in the previous literature. The results of this study indicate that the actual consumption profile of a constrained household is suboptimal and hence deepening financial access can decrease the welfare loss of this suboptimality.