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Title: Consumption and Aggregate Constraints: Evidence from US States and Canadian Provinces

Author(s): Charlotte Ostergaard, Bent E S�rensen and Oved Yosha

Publication Date: September 2001

Keyword(s): canadian provinces, consumption, excess sensitivity, excess smoothness, permanent income, regional macroeconomics, risk sharing and US states

Programme Area(s): International Macroeconomics

Abstract: State-level consumption exhibits excess sensitivity to lagged income to the same extent as US aggregate data, but state-specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged stste-specific income - a result that also holds for Canadian provinces. We propose the following interpretation: borrowing and lending in response to changes in consumer demand is easier for an individual US state than it is for the US as a whole. The PIH may thus be a good model for describing the reaction of consumption to idiosynctratic disposable income shocks even if it fails at the aggregate US level. Further analysis, centered on the persistence of income shocks and on the consumption/income ratio, is consistent with this interpretation but suggests that the PIH still requires qualification. We contrast our results with tests of full inter-state risk sharing.

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Bibliographic Reference

Ostergaard, C, S�rensen, B and Yosha, O. 2001. 'Consumption and Aggregate Constraints: Evidence from US States and Canadian Provinces'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2947