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Consumption and Liquidity Constraints in Australia and East Asia: Does Financial Integration Matter?

Author

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  • Gordon de Brouwer

    (Reserve Bank of Australia)

Abstract

One of the recurring themes in the literature on financial systems is whether financial integration – that is, openness in the domestic and international financial system – has real, structural economic effects. This paper examines the effect of financial openness on the consumption of non-durables in Australia and selected East Asian economies. A range of variables, some of which explicitly represent financial regulation, are used to proxy the shadow price of the liquidity constraint. Non-durable consumption in Hong Kong, Japan, Korea, Singapore, Taiwan and Thailand can be modelled as the outcome of constrained optimisation, in some cases with time-varying real interest rates and demographic change, while that in Australia is liquidity unconstrained, at least from the 1980s. The constraint appears constant but very weak in Hong Kong and declining in Singapore, consistent with the extent and timing of domestic and international financial reforms in these economies. It appears unchanged for Japan and Korea. For Taiwan and Thailand, there is strong evidence that domestic financial regulation and control have constrained the intertemporal optimisation of consumption, although the constraint may be expected to unwind with recent liberalisation. The experience of Australia and the selected East Asian economies suggests that the liberalisation of the capital account, combined with deregulation and expansion of the domestic financial sector, eases the constraints on consumption smoothing. Financial integration does matter. The experience of these countries also indicates that there is no simple connection between the openess of a country’s financial system and its saving and investment performance.

Suggested Citation

  • Gordon de Brouwer, 1996. "Consumption and Liquidity Constraints in Australia and East Asia: Does Financial Integration Matter?," RBA Research Discussion Papers rdp9602, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9602
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    References listed on IDEAS

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    Cited by:

    1. Peter Quartey, 2005. "Financial Sector Development, Savings Mobilization and Poverty Reduction in Ghana," WIDER Working Paper Series RP2005-71, World Institute for Development Economic Research (UNU-WIDER).
    2. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
    3. Messinis, George & Henry, Olan & Olekalns, Nilss, 2002. "Rational habit modification in consumption," Economic Modelling, Elsevier, vol. 19(4), pages 665-678, August.
    4. Gianni La Cava & John Simon, 2003. "A Tale of Two Surveys: Household Debt and Financial Constraints in Australia," RBA Research Discussion Papers rdp2003-08, Reserve Bank of Australia.
    5. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "Capital Markets and the Instability of Open Economies," Working Papers 99.01, Swiss National Bank, Study Center Gerzensee.
    6. Alvin Tan & Graham Voss, 2000. "Consumption and Wealth," RBA Research Discussion Papers rdp2000-09, Reserve Bank of Australia.
    7. Henry, O. & Messinis, G. & Olekalns, N., 1999. "Rational Habit Modification: the Role of Credit," Department of Economics - Working Papers Series 729, The University of Melbourne.
    8. Ramiz Rahmanov, 2014. "Liquidity Constraints, Loss Aversion, and Myopia: Evidence from Central and Eastern European Countries," William Davidson Institute Working Papers Series wp1082, William Davidson Institute at the University of Michigan.

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    More about this item

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O56 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Oceania

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