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Consumption and Aggregate Constraints: International Evidence

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Author Info

  • Joseph DeJuan

    (University of Waterloo)

  • Maria J. Luengo-Prado

    (Northeastern University)

Abstract

This paper documents that region-level consumption exhibits excess sensitivity to lagged income in Italy, Japan, Spain, the United Kingdom and West Germany. However, region-specific idiosyncratic) consumption exhibits substantially less sensitivity to lagged region-specific income. Also, 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 those reported in Ostergaard, Sorensen & Yosha (2002) for U.S. state-level and Canadian province-level data, and provide empirical support for the hypothesis that closed-economy constraints may partly be responsible for the excess sensitivity phenomenon in aggregate data.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0501018.

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Length: 21 pages
Date of creation: 14 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501018

Note: Type of Document - pdf; pages: 21
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Web page: http://128.118.178.162

Related research

Keywords: Permanent Income Hypothesis; Consumption; Regional Data; Openness;

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References

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  1. Charlotte Ostergaard & Bent E. Sorensen & Oved Yosha, 2000. "Consumption and aggregate constraints : evidence from U.S. states and Canadian provinces," Research Working Paper RWP 00-04, Federal Reserve Bank of Kansas City.
  2. Guiso, Luigi & Jappelli, Tullio & Padula, Mario & Pagano, Marco, 2004. "Financial Market Integration and Economic Growth in the EU," CEPR Discussion Papers 4395, C.E.P.R. Discussion Papers.
  3. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
  4. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
  5. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  6. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
  7. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  9. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
  10. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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Citations

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Cited by:
  1. Xiujian Chen & Shu Lin & W. Robert Reed, 2006. "A Monte Carlo Evaluation of the Efficiency of the PCSE Estimator," Working Papers in Economics 06/14, University of Canterbury, Department of Economics and Finance.
  2. Xiujian Chen & Shu Lin & W. Robert Reed, 2005. "Another Look At What To Do With Time-Series Cross-Section Data," Econometrics 0506004, EconWPA.

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