Working Paper: CEPR ID: DP1030
Authors: Tamim A. Bayoumi; Ronald McDonald
Abstract: This paper tests for the optimality of consumption across Canadian provinces. The results indicate that consumption is highly integrated within the central and eastern core of the country, based around Ontario and Quebec. This is not true for provinces in the western half of the country, however, or for the most easterly province, Newfoundland. All of the provinces which fail the test for optimality are subject to large regional income disturbances. It is concluded that large enough disturbances can limit financial intermediation even when capital markets are highly integrated, as they are in Canada.
Keywords: capital market integration; consumption
JEL Codes: E44; F36; R22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income disturbances (E25) | Consumption patterns (D10) |
| Idiosyncratic income disturbances (D89) | Financial intermediation (G21) |
| Idiosyncratic income disturbances (D89) | Excess sensitivity of consumption to local income (D12) |
| Integrated capital markets (G19) | Optimal consumption paths (D15) |
| Large idiosyncratic income disturbances (H31) | Disruption of financial intermediation (F65) |
| Consumption integration in central and eastern provinces (R22) | High correlation in consumption patterns (D10) |
| Local income (H79) | Consumption paths in western provinces (R22) |
| Regional income shocks (R11) | Consumption patterns (D10) |