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The Implications of Lower Down Payments on Consumption Volatility

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  • Christopher Farr and Maria J. Luengo-Prado

Abstract

We examine the effects of decreasing down payment requirements on consumption volatility within a model which generalizes the standard buffer-stock model of saving to accommodate durables, nondurables and a collateralized liquidity constraint. We consider both a version of the model without adjustment costs in the durable goods market and a version with adjustment costs. Since there is no known analytical solution to the model, we solve it numerically. We find that nondurable consumption becomes more volatile as down payment requirements decrease. This finding is true for both individual and aggregate consumption, and it is robust to the inclusion of adjustment costs. Transitional dynamics imply that a financial liberalization leads to a temporary consumption boom.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 196.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:196

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Keywords: Buffer-stock; Consumption; Durable Goods;

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  1. Bernanke, Ben S, 1984. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 587-614, August.
  2. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  3. Bayoumi, Tamim, 1993. "Financial Deregulation and Household Saving," Economic Journal, Royal Economic Society, vol. 103(421), pages 1432-43, November.
  4. Attanasio, O., 1998. "Consumption demand," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  5. Browning, M. & Crossley, T., 1999. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," ANU Working Papers in Economics and Econometrics 1999-376, Australian National University, College of Business and Economics, School of Economics.
  6. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  7. Alessi, R & Michael Devereux & Guglielmo Weber, 1993. "Intertemporal consumption, durables and liquidity constraints: a cohort analysis," IFS Working Papers W93/07, Institute for Fiscal Studies.
  8. Brugiavini, A. & Weber, G., 1992. "Durables and Nondurables Consumption: Edidence from Italian Household Data," Papers 184, Banca Italia - Servizio di Studi.
  9. 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.
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