Financial Deregulation and Consumer Behavior: the Norwegian Experience

The present paper uses the model by Campbell and Mankiw (1991) to examine the Norwegian consumer behavior and the role of the financial deregulation during the 1980s. For quarterly data on non-durables and services, we estimate the fraction of current income consumers to be in the range of 37% and 75% before the financial deregulation. This evidence indicates a substantial departure from the rational, forward-looking behavior, and there is thus reason to believe that liquidity constraints did bind the Norwegian consumer behavior until the mid 1980s. Our results further suggest that this evidence has disappeared after the financial deregulation in that the estimated fraction of current income consumers is essentially zero after 1985. This finding is so much more remarkable in that hardly any other aggregate time-series data set, from any country, conforms this closely with the forward-looking hypothesis.