Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces

FRB of Kansas City Research Working Paper No. 00-04

26 Pages Posted: 2 Jun 2001

See all articles by Charlotte Ostergaard

Charlotte Ostergaard

BI Norwegian Business School, Department of Finance; European Corporate Governance Institute (ECGI)

Bent E. Sørensen

University of Houston - Department of Economics; Centre for Economic Policy Research (CEPR)

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2000

Abstract

State-level consumption exhibits excess sensitivity to lagged income to the same extent as US aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state-specific income - a result that also holds for Canadian provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand is easier for an individual US state than it is for the US as a whole. The PIH may thus be a good model for describing the reaction of consumption to idiosyncratic disposable income shocks even if it fails at the aggregate US level. Further analysis, centered on the persistence of income shocks and on the consumption /income ratio, is consistent with this interpretation but suggests that the PIH still requires qualification. We contrast our results with tests of full inter-state risk sharing.

Keywords: Permanent Income, Consumption, Regional Macroeconomics, Excess Sensitivity, Excess Smoothness, Risk Sharing, US States, Canadian Provinces

JEL Classification: E21

Suggested Citation

Ostergaard, Charlotte and Sorensen, Bent E. and Yosha, Oved, Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces (November 2000). FRB of Kansas City Research Working Paper No. 00-04. Available at SSRN: https://ssrn.com/abstract=271954 or http://dx.doi.org/10.2139/ssrn.271954

Charlotte Ostergaard

BI Norwegian Business School, Department of Finance ( email )

Nydalsveien 37
Oslo, 0442
Norway
+4746410520 (Phone)

HOME PAGE: http://home.bi.no/charlotte.ostergaard/

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Bent E. Sorensen (Contact Author)

University of Houston - Department of Economics ( email )

204 McElhinney Hall
Houston, TX 77204-5882
United States
713-743-3841 (Phone)
713-743-3798 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

N/A

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