Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources

Previous tests for liquidity constraints using consumption Euler equations have frequently split the sample on the basis of welath arguing that low wealth consumers are more likely to be constrained. We propose alternative tests using different and more direct information on borrowing constraints obtained from the 1983 Survey of Consumer Finances. Our estimates indicate stronger excess sensitivity associated with the possiblity of liquidity constraints than the sample setting splitting approach.