Working Paper no. 157
By Emilio Fernandez-Corugedo and Simon Price
This paper examines whether the methodology used in the papers by Darby and Ireland and Caporale and Williams continues to explain UK consumption behaviour. We update Muellbauer and Murphy’s proxy for financial liberalisation (FLIB) and re-examine a forward-looking consumption model which uses FLIB as a variable affecting the proportion of liquidity-constrained individuals. We find that this implementation of the model, incorporating joint hypotheses about consumption behaviour and the measurement of financial liberalisation, is not robust and is not able to give a consistent picture of the number of people who were liquidity constrained in the 1990s.