Advanced Search
MyIDEAS: Login

Durables, Nondurables, Down Payments and Consumption Excesses

Contents:

Author Info

  • Maria J. Luengo-Prado

    (Northeastern University)

Abstract

We examine a model that generalizes the standard buffer-stock model of savings to accommodate durables, nondurables and a collateralized liquidity constraint, with and without adjustment costs in the durables market. 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 at the individual and at the aggregate level. Moreover, for plausible parameter values the model can explain the excess smoothness and excess sensitivity observed in the U.S. economy. The results follow from a gradual adjustment of consumption to permanent income shocks in an attempt by agents to spread out the burden of down payments over time.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://128.118.178.162/eps/mac/papers/0408/0408006.pdf
Download Restriction: no

Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0408006.

as in new window
Length: 45 pages
Date of creation: 10 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0408006

Note: Type of Document - pdf; pages: 45
Contact details of provider:
Web page: http://128.118.178.162

Related research

Keywords: Buffer Stock; Consumption; Durable Goods;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. 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.
  3. Attanasio, O. & Weber, G., 1995. "Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
  4. 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.
  5. Pishke, J.S., 1992. "Individual Income, Incomplete Information and Aggregate Consumption," Papers 9238, Tilburg - Center for Economic Research.
  6. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  7. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  8. Lawrence J. Christiano & Martin Eichenbaum & David Marshall, 1987. "The Permanent Income Hypothesis Revisited," NBER Working Papers 2209, National Bureau of Economic Research, Inc.
  9. Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
  10. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  11. 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.
  12. 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.
  13. Cevdet Denizer & Murat Iyigun & Ann Owen, 2000. "Finance and Macroeconomic Volatility," Macroeconomics 0004015, EconWPA.
  14. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
  15. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
  16. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  17. Chah, Eun Young & Ramey, Valerie A & Starr, Ross M, 1995. "Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 272-87, February.
  18. 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.
  19. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  20. Jappelli, Tullio & Pagano, Marco, 1989. "Consumption and Capital Market Imperfections: An International Comparison," American Economic Review, American Economic Association, vol. 79(5), pages 1088-1105, December.
  21. 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.
  22. Caballero, R.J., 1990. "Durable Goods: An Explanation For Their Slow Adjustment," Discussion Papers 1990_49, Columbia University, Department of Economics.
  23. Martin Browning & Thomas Crossley, . "Shocks, stocks and socks: consumption smoothing and the replacement of durables during an unemployment spell," Canadian International Labour Network Working Papers 27, McMaster University.
  24. Urban J. Jermann & Marianne Baxter, 1999. "Household Production and the Excess Sensitivity of Consumption to Current Income," American Economic Review, American Economic Association, vol. 89(4), pages 902-920, September.
  25. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  26. Lam, Pok-sang, 1989. "Irreversibility and consumer durables expenditures," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 135-150, January.
  27. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  28. Hansen, Lars Peter & Sargent, Thomas J., 1981. "A note on Wiener-Kolmogorov prediction formulas for rational expectations models," Economics Letters, Elsevier, vol. 8(3), pages 255-260.
  29. Eberly, J.C., 1990. "Adjustment of Consumers'durables Stocks: Evidence from Automobile Purchases," Weiss Center Working Papers 22-91, Wharton School - Weiss Center for International Financial Research.
  30. Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
  31. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, September.
  32. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  33. Wendy E. Dunn, 1998. "Unemployment risk, precautionary saving, and durable goods purchase decisions," Finance and Economics Discussion Series 1998-49, Board of Governors of the Federal Reserve System (U.S.).
  34. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  35. 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.
  36. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  37. Robert E. Hall & Frederic S. Mishkin, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  38. 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.
  39. Philippe BACCHETTA & Stefan GERLACH, 1997. "Consumption and Credit Constraints : International Evidence," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9707, Université de Lausanne, Faculté des HEC, DEEP.
  40. G. Peersman & L. Pozzi, 2004. "Determinants of consumption smoothing," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/231, Ghent University, Faculty of Economics and Business Administration.
  41. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  42. repec:fth:coluec:465 is not listed on IDEAS
  43. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Kurt Kratena & Michael Wüger, 2010. "The Full Impact of Energy Efficiency on Households' Energy Demand," WIFO Working Papers 356, WIFO.
  2. Punzi, Maria Teresa, 2012. "Housing market and current account imbalances in the international economy," Research Discussion Papers 1/2012, Bank of Finland.
  3. Chen, Nan-Kuang & Chen, Shiu-Sheng & Chou, Yu-Hsi, 2010. "House prices, collateral constraint, and the asymmetric effect on consumption," Journal of Housing Economics, Elsevier, vol. 19(1), pages 26-37, March.
  4. Bent E. Sorensen & Maria J. Luengo-Prado, 2004. "The Buffer Stock Model and the Aggregate Propensity to Consume," Econometric Society 2004 North American Summer Meetings 457, Econometric Society.
  5. Antonia Díaz & Maria Jose Luengo-Prado, 2006. "The Wealth Distribution With Durable Goods," Economics Working Papers we067027, Universidad Carlos III, Departamento de Economía.
  6. Patrick Bajari & Phoebe Chan & Dirk Krueger & Daniel Miller, 2010. "A Dynamic Model of Housing Demand: Estimation and Policy Implications," NBER Working Papers 15955, National Bureau of Economic Research, Inc.
  7. Helge Braun & Winfried Koeniger, 2007. "On the role of market insurance in a dynamic model," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 32(1), pages 61-90, June.
  8. Joseph Vavra & David Berger, 2012. "Consumption Dynamics During the Great Recession," 2012 Meeting Papers 109, Society for Economic Dynamics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0408006

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.