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Dynamic Consumption Models for German States: The Role of Excess Sensitivity to Income and Regional Heterogeneity in Adjustment

In: Empirical Modelling in Regional Science

Author

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  • Timo Mitze

    (Rheinisch-Westfälisches Institut für Wirtschaftsforschung)

Abstract

This paper analyzes the sensitivity of regional consumption patterns to current income shocks for different samples of German state level data between 1970 and 2007. We estimate dynamic consumption models derived from neoclassical consumption theory, where our estimation approach rests on both short-run as well as combined short- and long-run consumption models. In particular, using a habit formation augmented model for the Permanent Income Hypothesis the paper tests the significance and size of “excess sensitivity” in consumption due to predictable income shocks. The latter may reflect myopic behavior, liquidity constraints or loss aversion. Generally, our results do not support the hypothesis of strong excess income sensitivity. This may hint at the (limited) effectiveness of policy measures for short-term demand stabilization. Additionally, by testing for slope homogeneity in the dynamic consumption models, we are able to identify regional asymmetries in the adjustment path to long-run equilibrium. Finally, given the regional nature of our data, we also account for the likely role of spatial interrelations among the variables.

Suggested Citation

  • Timo Mitze, 2012. "Dynamic Consumption Models for German States: The Role of Excess Sensitivity to Income and Regional Heterogeneity in Adjustment," Lecture Notes in Economics and Mathematical Systems, in: Empirical Modelling in Regional Science, edition 127, chapter 0, pages 303-339, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-22901-5_10
    DOI: 10.1007/978-3-642-22901-5_10
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