Asymmetries in Household Consumption and Liquidity Constraints -- A Switching Regression Approach

Most of the empirical work in the Euler equation tradition in the consumption literature, has tested the hypotheses of Excess sensitivity and LIquidity constraints, with the sample selection based on a single exogenous criterion. Such a method will give misleading inferences, if the sample selection criterion is correlated with the Euler equation errors. In this paper, an attempt is made to correct for the sample selection bias by estimating the probability of selection simultaneously with the Euler equation parameter.