The Effect of Financial Liberalization on Household Liquidity Constraints

In this paper, the effect of financial liberalization on household’s budget liquidity constraint is analyzed with the use of an error correction model. Financial liberalization will decline liquidity constraint, with expanding means of making future incomes available for present consumption. Here a financial liberalization index for Iran is defined using Principal component Analysis technique, based on 6 variables. After dividing the time period into 2 sub periods, the income ratio of people confronting liquidity constraint is estimated for each sub group. The results show that financial liberalization has not declined liquidity constraint in Iran.