Consumption Smoothing and Borrowing Constraints: Evidence from Household Surveys of Iran

Abstract

We use Iranian Household Expenditure and Income Survey to analyze the dynamics of consumption of the households. We observe evidence of excess sensitivity in a cohort pseudo panel of Iranian households. Excess sensitivity, however, is absent for government employees who have better access to nance due to the structure of labor market and banking system in Iran. Our results support the idea that borrowing constraints is the main cause for evidence of excess sensitivity. This indicates that actual consumption prole is sub-optimal and hence deepening financial access will decrease the welfare loss of this sub-optimality. In the paper, we have also provided estimates of elasticity of inter-temporal substitution for the Iranian households for the first time, and they are consistent with those of other developing countries.

Keywords: Consumption Smoothing, Permanent Income Hypothesis, Euler Equation, Excess Sensitivity, Borrowing Constraints

JEL Classification: C55, D12, D14, D91, E21, O53