Description

This paper studies empirically the relation between household economic saving (including durable good purchases) and the business cycle using Chilean data. The data show that the relation between household saving and the business cycle is given by the durable consumption dynamics. Consequently, a group of econometric regressions are made in order to study the connections between both kinds of goods. This is the first paper that empirically tests the implications of the permanent income hypothesis (PIH) and the liquidity constraint approach. Several interesting results emerge: first, the strong and weak implications of the PIH are rejected; second, liquidity constraints are moderate and affect both durable and non-durable goods; and, third, Chilean consumers do not smooth consumption because liquidity constraints are binding and not because they are non-rational.