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To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-0084.2009.00565.x Byline: Joseph P. Dejuan ([dagger]), John J. Seater ([double dagger]), Tony S. Wirjanto ([dagger]) Keywords: E20; E21; R10 Abstract: Abstract This paper utilizes relatively unexplored Canadian provincial-level data to investigate an old but still relevant question in macroeconomics as to whether consumption responds to income innovations in a manner consistent with the stochastic implications of the permanent income hypothesis (PIH). The empirical results obtained do not appear to be in accord with the PIH. Instead, consumption's response to income innovations is found to be much weaker than that predicted by PIH; in particular, the response displays an asymmetric pattern in the sense that it is much stronger for negative than positive income innovations. We interpret this evidence of asymmetry as indicative of the presence of liquidity constraints in provincial households. Author Affiliation: ([dagger])Department of Economics, University of Waterloo, Waterloo, ON, Canada (e-mail:jdejuan@uwaterloo.ca,twirjant@uwaterloo.ca) ([double dagger])Department of Economics, North Carolina State University, Raleigh, NC, USA (e-mail:John_seater@ncsu.edu) Article History: Final Manuscript Received: June 2009

This paper examines a key stochastic implication of the canonical version of the permanent income model that new information about future income should give rise to an adjustment in consumption equal in magnitude to the adjustment in permanent income. Using data from 29 Chinese provinces, the empirical results are consistent with the model. [ABSTRACT FROM AUTHOR]

This paper documents that region-level consumption exhibits excess sensitivity to lagged region-level income in Italy, Japan, Spain, the UK and West Germany. However, region-specific consumption exhibits substantially less sensitivity to lagged region-specific income. Moreover, excess sensitivity is inversely related to standard measures of openness and credit market integration and for most countries, it has decreased over time. These findings are consistent with the results reported by Ostergaard et al. [ Journal of Political Economy (2002) Vol. 110, pp. 634–645] for US states and Canadian provinces, and provide empirical support for the hypothesis that closed-economy constraints may partly be responsible for the excess sensitivity phenomenon in aggregate data. [ABSTRACT FROM AUTHOR]