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Mankiw's Puzzle on Consumer Durables: A Misspecification

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  • Tam Bang Vu

    ()
    (Department of Economics, University of Hawaii at Manoa)

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    Abstract

    Mankiw (1982) shows that consumer durables expenditures should follow a linear ARMA(1,1) process, but the data analyzed supports an AR(1) process instead; thus, a puzzle. In this paper, we employ a more general utility function than Mankiw's quadratic one. Further, the disturbance and depreciation rate are respecified, respectively, as multiplicative and stochastic. The analytical consequence is a nonlinear ARMA(infinity,1) process, which implies that the linear ARMA(1,1) is a misspecification. A historical data analysis appears to support the nonlinear model. Since actual data are influenced by historical events, we also carry out a Monte Carlo study to strengthen our point

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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_05-15.pdf
    File Function: First version, 2005
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    Bibliographic Info

    Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200515.

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    Length: 25 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:hai:wpaper:200515

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    Related research

    Keywords: utility function; multiplicative disturbance; nonlinear ARMA(8; 1) process; stochastic depreciation; misspecification error;

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    1. N. Gregory Mankiw, 1983. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc.
    2. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
    3. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
    4. repec:fth:coluec:444 is not listed on IDEAS
    5. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
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