 |
Consumption and Aggregate Constraints: Evidence from US States and Canadian ProvincesBy Bent Sorensen, Charlotte Ostergaard, & Oved Yosha |
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 state-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 idiosyncratic 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. Charlotte Ostergaard is an assistant professor at the Norwegian School of
Management. Bent E. Sorensen is an economist at the Federal Reserve Bank of Kansas City.
Oved Yosha is a senior lecturer at Tel Aviv University. The authors thank Karen Lewis,
Nouriel Roubini, and David Weil for useful discussions on risk sharing and consumption
smoothing, and Marco del Negro for his kind help with data. The views expressed by the
authors do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or
the Federal Reserve System.
|