Consumption and Aggregate Constraints: Evidence from U.S. States and Canadian Provinces

State‐level consumption exhibits excess sensitivity to lagged income to the same extent as U.S. aggregate data, but state‐specific (idiosyncratic) consumption exhibits substantially less sensitivity to lagged state‐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 are easier for individual U.S. states than for the United States as a whole, and therefore, the measured deviation from the benchmark permanent income hypothesis model is smaller. However, lagged state‐specific variables help predict state‐specific consumption, suggesting that the PIH model still requires qualification.