Abstract
We examine the effect of financial deregulation on consumption expenditure in the United Kingdom. A non-linear model for consumption which allows for liquidity constraints through a time-varying parameter dependent on a proxy for financial deregulation is estimated using non-linear instrumental variables. It is concluded that U.K. financial deregulation has significantly reduced liquidity constraints faced by consumers, allowing a higher percentage of the population to smooth consumption over time. The estimated path of the time-varying parameter, interpreted as the proportion of income going to liquidity-constrained households, is consistent with the process of U.K. financial deregulation.
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