An empirical investigation of the effect of borrowing constraints on Spanish consumption

Abstract. This work analyses the relevance of borrowing constraints on the intertemporal behaviour of Spanish non-durable consumption. We estimate Euler equations with cohort data extracted from the “Encuesta Continua de Presupuestos Familiares” (ECPF) for the period 1985–1993. The results are robust to the use of different estimators to eliminate fixed individual effects, to different specifications of the model, to the effect of uncertainty and to the presence of habits in consumption. Our results allow us to conclude that non-durable consumption of a considerable fraction of the Spanish population is affected by borrowing constraints. At the same time, and in accordance with similar results for other countries, we confirm that borrowing constraints are especially important for the young. The author acknowledges the grant received from the Conselleria de Cultura, Educación y Ciencia de la Generalitat Valènciana, as part of its grant's programme for stays in foreign universities and the financial support by DGICYT grants SEC99-0820 and SEC 2002-00667. The author also acknowledges the hospitality of the Department of Economics at University College London (UCL) and of the Departamento de Análisis Económico de la Universidad Nacional de Educación a Distancia. This work has been presented in the XXV Simposio de Análisis Económico, held in Bellaterra (Spain) in December 2000. Finally, the author acknowledges comments by J. E. Boscá and two anonymous referees that have contributed to improving the final version of the paper.