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Permanent Income, Consumption and Aggregate Constraints: Evidence from US States

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  • Bent E. Sorensen
  • Charlotte Ostergaard
  • Oved Yosha

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, demand. Ordering states by the persistence of income shocks, we find that removal 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 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.

Suggested Citation

  • Bent E. Sorensen & Charlotte Ostergaard & Oved Yosha, 1998. "Permanent Income, Consumption and Aggregate Constraints: Evidence from US States," FMG Discussion Papers dp287, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp287
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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