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Permanent Income, Consumption, and Aggregate Constraints: Evidence from U.S. States

Charlotte Ostregaard, Bent Sorensen and Oved Yosha

No 275632, Foerder Institute for Economic Research Working Papers from Tel-Aviv University > Foerder Institute for Economic Research

Abstract: We remove the aggregate US-wide component in US state level disposable income and consumption and find that state-specific consumption exhibits substantially less excess sensitivity to lagged state-specific disposable income than if the aggregate component is not controlled for. This is evidence that excess sensitivity of consumption in aggregate US data is driven to a large extent by US-wide effects since, in the aggregate, US net imports and investment do not adjust quickly to fluctuations in consumption demand. Ordering states by the persistence of income shocks, we find that removal of the aggregate component from the state level data reduces excess sensitivity for all states by the same amount and that the excess sensitivity of consumption is greater in states with more persistent income shocks. We also find that state-specific disposable income and consumption exhibit excess smoothness in the sense of Campbell and Deaton (1989), namely, current state-specific consumption is not sufficiently sensitive to current state-specific income; in particular for positive shocks. Finally, we study patterns of consumption smoothing via bank savings deposits and loans. Our results point to credit market imperfections as the most plausible explanation for excess smoothness and the remaining excess sensitivity.

Keywords: Financial Economics; Political Economy (search for similar items in EconPapers)
Date: 1998-01
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Working Paper: Permanent Income, Consumption and Aggregate Constraints: Evidence from US States (1998) Downloads
Working Paper: Permanent Income, Consumption, and Aggregate Constraints: Evidence from US States (1998)
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