Consumption in Developing Countries: Tests for Liquidity Constraints and Finite Horizons

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Abstract
Adjustment programs in developing countries emphasize the importance of reducing fiscal deficits in order to improve aggregate saving and investment performance. Recent theoretical analyses associated with the Ricardian equivalence proposition, however, suggest that changes in the level of public sector saving may be offset by a change in private saving. The empirical relevance of this proposition depends, among other things, on the length of consumers' horizons and on the extent to which households are liquidity-constrained. Empirical tests of a consumption model for a sample of developing economies do not support the equivalence proposition owing to the prevalence of liquidity constraints.

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