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

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 aggreagte 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.