What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?

Maria Luengo-Prado and Bent Sorensen

The Review of Economics and Statistics, 2008, vol. 90, issue 1, 65-80

Abstract: This article estimates marginal propensities to consume (MPC) out of current and lagged income for U.S. states using panel data regressions that control for time-specific and state-level fixed effects. The MPCs vary across states; in particular, the MPC out of current income is higher in states where income is more persistent, and the MPC out of lagged income is lower in agricultural states. We show that the estimated MPCs can be matched by a model of forward-looking consumers that includes all of the following features: time aggregation, durable goods, impatience, credit constraints, and risk sharing. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2008
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