Notes on the Theory and Evidence on Aggregate Purchases of Durable Goods
The basic implications of the frictionless permanent income hypothesis for durable goods purchases are strongly rejected by the data. At the aggregate level there is too much inertia. At the macroeconomic level purchases are too infrequent and lumpy. In principle these rejections can be simultaneously rationalized by the presence of fixed costs of adjustment at the microeconomic level. This article provides a simplified overview of recent developments attempting to formalize and measure the implications of models of fixed cost of adjustment for microeconomic and especially, aggregate behavior of expenditure on durable goods. It contends that these efforts have paid off in terms of methodological and empirical improvements. Copyright 1994 by Oxford University Press.
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