Search

Households need to have a smooth level of consumption in order to maximize their utility. Among the factors influencing consumption smoothing are: the existence of a perfect capital market, lack of liquidity constraints and access to financial resources, so that individuals are able to borrow and lend in order to prevent their income and consumption fluctuations. This paper attempts to investigate the excess sensitivity of household consumption with emphasis on liquidity constraints in Iran using panel data related to two recessionary periods of 2013-2015 and the pre-recessionary period of 2010-2012. The results show that the excess sensitivity of consumption to current income is significant. This finding rejects the permanent income hypothesis based on rational expectations in Iran. The asymmetric impacts of the positive and negative growth rates of income on consumption confirm the liquidity constraints of households. Identification of the socioeconomic characteristics of households with higher sensitivity, especially during the recession of 2013-2014, suggests that households without access to or inadequate access to bank loans, the elderly-headed households, families headed by non-governmental employees, low-income and rural households are more sensitive to income in comparison to the other households.

Household’s consumption expenditures are one of the main economic variables that reflect the households’ welfare level as well as stimulate aggregate demand and purpose of all production in the economy. Therefore, measuring the income shocks transmission to household consumption is critical for evaluation the ability of consumption smoothing with income shocks or economic stability and hence, for designing stabilization, income-maintenance and optimal social policies in the aim to increasing purchasing power, preserving and promoting the welfare of households. According to the terms of stagflation in Iran economy over the past few years, this paper computes the degree of transmission of temporary and permanent income shocks using the panel data on the income, meal consumption expenditures and other household characteristics (age, gender, education, working status and marital status) gathered by Iranian urban and rural households’ expenditures and income surveys (HEIS) over the period 2009-2014. The results show that there is nearly complete insurance against temporary and permanent income during the period of study. [ABSTRACT FROM AUTHOR]