This paper documents that region-level consumption exhibits excess sensitivity to lagged region-level income in Italy, Japan, Spain, the UK and West Germany. However, "region-specific" consumption exhibits substantially less sensitivity to lagged region-specific income. Moreover, excess sensitivity is inversely related to standard measures of openness and credit market integration and for most countries, it has decreased over time. These findings are consistent with the results reported by Ostergaard "et al." ["Journal of Political Economy" (2002) Vol. 110, pp. 634-645] for US states and Canadian provinces, and provide empirical support for the hypothesis that closed-economy constraints may partly be responsible for the excess sensitivity phenomenon in aggregate data. Copyright 2006 Blackwell Publishing Ltd.
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