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

  • Charlotte Ostergaard
  • Bent E. Serensen
  • Oved Yosha

State-level consumption exhibits excess sensitivity to lagged income to the same extent as U.S. aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state-specific incomea result that also holds for Canadian provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand are easier for individual U.S. states than for the United States as a whole, and therefore, the measured deviation from the benchmark permanent income hypothesis model is smaller. However, lagged state-specific variables help predict state-specific consumption, suggesting that the PIH model still requires qualification.

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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 110 (2002)
Issue (Month): 3 (June)
Pages: 634-645

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Handle: RePEc:ucp:jpolec:v:110:y:2002:i:3:p:634-645
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