Working Paper: CEPR ID: DP2947
Authors: Charlotte Ostergaard; Bent E. Sorensen; 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 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.
Keywords: Canadian provinces; Consumption; Excess sensitivity; Excess smoothness; Permanent income; Regional macroeconomics; Risk sharing
JEL Codes: E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| state-level consumption in the U.S. (H79) | excess sensitivity to lagged income (H31) |
| aggregate U.S. data (C80) | excess sensitivity to lagged income (H31) |
| states' idiosyncratic consumption (D10) | less sensitivity to lagged state-specific income (H31) |
| borrowing and lending mechanisms (G21) | feasibility at state level (H70) |
| Permanent Income Hypothesis (PIH) (D15) | consumption reactions to idiosyncratic disposable income shocks (E21) |
| persistence of income shocks (G59) | consumption-income ratio (E20) |