This paper derives the discrete‐time counterpart of Blanchard’s overlapping generations model of consumer expenditure. The model is combined with two different models of liquidity‐constrained consumers; in the first the percentage of income accruing to such consumers is constant; in the second it is allowed to decrease over time. These models are estimated for five countries over the period 1967–92, and pass all standard specifications as well as some alternative non‐parametric tests. Our estimates suggest that in Canada and the USA the number of liquidity‐constrained consumers decreased substantially in the late 1970s and early 1980s. In Germany and the UK these changes occurred later and were less pronounced.
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Sefton et al. (1999) studied this question.