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Mankiw's Puzzle on Consumer Durables: A Misspecification

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Author Info
Tam Bang Vu () (Department of Economics, University of Hawaii at Manoa)
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
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File Function: First version, 2005
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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;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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References listed on IDEAS
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  1. Caballero, R.J., 1989. "Expenditure On Durable Goods: A Case For Slow Adjustment," Discussion Papers 1989_21, Columbia University, Department of Economics.
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  2. 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. [Downloadable!] (restricted)
  3. N. Gregory Mankiw, 1985. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. repec:fth:coluec:444 is not listed on IDEAS
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