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Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy

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  • Hrishikesh D. Vinod

    (Fordham University, Department of Economics)

Abstract

Consumer theory still maximizes utility subject to a budget constraint, when in fact 2008 data show that consumer debt is 130% of disposable income. Granger-causality tests confirm Consumption precedence over income. We discuss several features of newer US data, such as the ability to start /stop part-time /full time work /school, allowing families a greater control on the timing and level of income. Hence, our Wiener-Hopf-Whittle model uses 'target-seeking' optimization, while our two-equation system makes both consumption and income endogenous, similar to quantities and prices in a demand system. The new model provides estimates of shadow prices of income level and adjustment costs, and is shown to help resolve five old 'puzzles' from the consumer theory literature.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-13.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-13

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Web page: http://www.fordham.edu/economics/
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Keywords: Stochastic dynamic optimum; Target seeking; VAR; Wiener-Hopf-Whittle; Causality testing;

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  1. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc.
  2. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2007. "The evolution of household income volatility," Finance and Economics Discussion Series 2007-61, Board of Governors of the Federal Reserve System (U.S.).
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  8. María José Luengo-Prado & Bent E. Sørensen, 2008. "What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 65-80, February.
  9. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  10. Caballero, R.J., 1988. "Consumption Puzzles And Precautionary Savings," Discussion Papers 1988_05, Columbia University, Department of Economics.
  11. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
  12. Steven J. Davis, 2008. "The Decline of Job Loss and Why It Matters," American Economic Review, American Economic Association, vol. 98(2), pages 263-67, May.
  13. Kasey Buckles, 2008. "Understanding the Returns to Delayed Childbearing for Working Women," American Economic Review, American Economic Association, vol. 98(2), pages 403-07, May.
  14. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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