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What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?

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  • María José Luengo-Prado

    (Northeastern University)

  • Bent E. Sørensen

    (University of Houston, CEPR)

Abstract

This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and state-level fixed effects. The MPCs vary across states; in particular, the MPC out of current income is higher in states where income is more persistent, and the MPC out of lagged income is lower in agricultural states. We show that the estimated MPCs can be matched by a model of forward-looking consumers that includes all of the following features: time aggregation, durable goods, impatience, credit constraints, and risk sharing. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 90 (2008)
Issue (Month): 1 (February)
Pages: 65-80

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Handle: RePEc:tpr:restat:v:90:y:2008:i:1:p:65-80

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Cited by:
  1. Hryshko, Dmytro & Luengo-Prado, Maria & Sorensen, Bent, 2010. "House Prices and Risk Sharing," Working Papers, University of Alberta, Department of Economics 2010-16, University of Alberta, Department of Economics.
  2. Elena Loutskina & Philip E. Strahan, 2006. "Securitization and the Declining Impact of Bank Finance on Loan Supply: Evidence from Mortgage Acceptance Rates," NBER Working Papers 11983, National Bureau of Economic Research, Inc.
  3. Kalemli-Ozcan, Sebnem & Luttini, Emiliano & Sørensen, Bent E, 2013. "Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9541, C.E.P.R. Discussion Papers.
  4. Thomas Grennes & Pablo Guerron-quintana & Asli Leblebicioglu, 2010. "Economic Development and Volatility among the States," Economics Bulletin, AccessEcon, vol. 30(3), pages 1963-1976.
  5. Juan Contreras & Joseph Nichols, 2009. "Consumption Responses to Permanent and Transitory Shocks to House Appreciation: Working Paper 2009-05," Working Papers, Congressional Budget Office 41876, Congressional Budget Office.
  6. Russell S. Sobel & Andrew Young, 2010. "Recovery and Reinvestment Act Spending at the State Level: Keynesian Stimulus or Distributive Politics?," Working Papers, Department of Economics, West Virginia University 10-17, Department of Economics, West Virginia University.
  7. Hrishikesh D. Vinod, 2008. "Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy," Fordham Economics Discussion Paper Series, Fordham University, Department of Economics dp2008-13, Fordham University, Department of Economics.
  8. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers, Institut d'Economia de Barcelona (IEB) 2011/27, Institut d'Economia de Barcelona (IEB).
  9. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sorensen, 2008. "Risk sharing and portfolio allocation in EMU," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 334, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  10. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2011. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," CFS Working Paper Series, Center for Financial Studies (CFS) 2011/27, Center for Financial Studies (CFS).
  11. Juan Contreras & Joseph Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-32, Board of Governors of the Federal Reserve System (U.S.).
  12. Fabrizio Perri & Dirk Krueger, 2009. "How does Household Consumption Respond to Income Shocks?," 2009 Meeting Papers, Society for Economic Dynamics 14, Society for Economic Dynamics.

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