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Durables, nondurables, down payments and consumption excesses

  • Jose Luengo-Prado, Maria

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.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 53 (2006)
Issue (Month): 7 (October)
Pages: 1509-1539

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Handle: RePEc:eee:moneco:v:53:y:2006:i:7:p:1509-1539
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