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Consumption and Aggregate Constraints: International Evidence

Listed author(s):
  • Joseph DeJuan

    (University of Waterloo)

  • Maria J. Luengo-Prado

    (Northeastern University)

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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File URL: http://econwpa.repec.org/eps/mac/papers/0501/0501018.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0501018.

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Length: 21 pages
Date of creation: 14 Jan 2005
Handle: RePEc:wpa:wuwpma:0501018
Note: Type of Document - pdf; pages: 21
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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 249-265, April.
  2. Luigi Guiso & Tullio Jappelli & Mario Padula & Marco Pagano, 2004. "Financial Market Integration and Economic Growth in the EU," CSEF Working Papers 118, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
  4. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  5. 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.
  6. 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.
  7. Charles R. Nelson, 1985. "A Reappraisal of Recent Tests of the Permanent Income Hypothesis," NBER Working Papers 1687, National Bureau of Economic Research, Inc.
  8. Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
  9. Ross Levine & Sara Zervos, "undated". "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  10. 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.
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