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Disinflation, Real Income Uncertainty and the Demand for Consumer Durables in a Mean–Variance Model of Portfolio Selection

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  • Jakob B. Madsen

Abstract

Survey evidence indicates that consumers only expect to be fractionally compensated by the real income reduction of inflation. Incorporating this evidence into a mean–variance model of portfolio selection, this paper shows that demand for durables is a negative function of expected inflation and income uncertainty. Using quarterly data for the USA and annual panel data for the OECD countries, empirical evidence shows that demand for durables is significantly adversely affected by inflation and income uncertainty, and that the recent disinflation has resulted in a significant increase in demand for durables.

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  • Jakob B. Madsen, 2001. "Disinflation, Real Income Uncertainty and the Demand for Consumer Durables in a Mean–Variance Model of Portfolio Selection," Manchester School, University of Manchester, vol. 69(2), pages 179-196, March.
    • Handle: RePEc:bla:manchs:v:69:y:2001:i:2:p:179-196
    DOI: 10.1111/1467-9957.00241
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    Cited by:

    1. Sushanta K. Mallick & Mohammed Mohsin, 2016. "Macroeconomic Effects of Inflationary Shocks with Durable and Non-Durable Consumption," Open Economies Review, Springer, vol. 27(5), pages 895-921, November.
    2. Madsen, Jakob B. & McAleer, Michael, 2001. "Consumption, liquidity constraints, uncertainty and temptation: An international comparison," Journal of Economic Psychology, Elsevier, vol. 22(1), pages 61-89, February.

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