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Obsolescence of Durable Goods and Optimal Consumption

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  • Dmitriy Stolyarov
  • Ennio Stacchetti

Abstract

We study a model with a durable good subject to abrupt, periodic obsolescence, and characterize the optimal purchasing policy. Consumers optimally synchronize new purchases with the arrival of new durable models. Hence, some agents use a "flexible" optimal replacement rule that switches between two adjacent replacement frequencies at irregular intervals. These agents react to wealth shocks by changing the timing of future purchases. The model has distinct comparative statics on obsolescence and durability and can explain how durables with high depreciation rates may have more volatile expenditure. The model also predicts how demand fluctuations respond to a change in product variety. These predictions match the observed changes in volatility of the US auto sales after the introduction of smaller foreign cars in the 1970s

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File URL: http://repec.org/esLATM04/up.26385.1082165503.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 312.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:312

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Keywords: Optimal consumption; durable goods; volatility;

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  1. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1994. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," NBER Working Papers 4887, National Bureau of Economic Research, Inc.
  2. Caballero, Ricardo J, 1993. "Durable Goods: An Explanation for Their Slow Adjustment," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 351-84, April.
  3. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  4. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  5. Christopher D Carroll & Wendy E Dunn, 1997. "Unemployment Expectations Jumping (Ss) Triggers and Household Balance Sheets," Economics Working Paper Archive 386, The Johns Hopkins University,Department of Economics.
  6. John V. Leahy & Joseph Zeira, 2000. "The Timing of Purchases and Aggregate Fluctuations," NBER Working Papers 7672, National Bureau of Economic Research, Inc.
  7. Eberly, Janice C, 1994. "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 403-36, June.
  8. Caballero, R.J., 1989. "Expenditure On Durable Goods: A Case For Slow Adjustment," Discussion Papers 1989_21, Columbia University, Department of Economics.
  9. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
  10. Jerome Adda & Russell Cooper, 2000. "The Dynamics of Car Sales: A Discrete Choice Approach," NBER Working Papers 7785, National Bureau of Economic Research, Inc.
  11. Bar-Ilan, Avner & Blinder, Alan S, 1992. "Consumer Durables: Evidence on the Optimality of Usually Doing Nothing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(2), pages 258-72, May.
  12. Andrew Caplin & John Leahy, 1999. "Durable Goods Cycles," NBER Working Papers 6987, National Bureau of Economic Research, Inc.
  13. Attanasio, Orazio P, 2000. "Consumer Durables and Inertial Behaviour: Estimation and Aggregation of (S, s) Rules for Automobile Purchases," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 667-96, October.
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Cited by:
  1. Gorodnichenko, Yuriy & Peter, Klara Sabirianova & Stolyarov, Dmitriy, 2009. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," IZA Discussion Papers 4233, Institute for the Study of Labor (IZA).
  2. Jerome Adda & Russell Cooper, 2000. "The Dynamics of Car Sales: A Discrete Choice Approach," NBER Working Papers 7785, National Bureau of Economic Research, Inc.

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