ON THE EXCESS SENSITIVITY OF CONSUMPTION TO INFORMATION ABOUT INCOME

When forward-looking individuals face binding borrowing constraints, c onsumption will exhibit excess sensitivity'' to lagged variables which are correlated. with income. However, the predictive capacity of such variables for consumption growth should. diminish when contemporaneou s and future income terms are used as regressors. U.S. data confirm th ese expectations. But the data from three other industrial countries a re not consistent with either borrowing constraints or other leading P ermanent Income Hypothesis (PIH) variants. The evidence from all sampl e countries suggests that variables correlated with future income migh t be used to re-examine the inconclusive evidence for the PIH from hou sehold data.