Expenditure on Durable Goods: A Case for Slow Adjustment
For more than a half a decade, the fact that expenditure on durables can be well approximated by a random walk has remained a hidden puzzle, challenging almost any theory in which agents smooth the use of their wealth. This paper shows that once a nonparsimonious approach is used, or lower frequencies of the data are examined, the fact itself disappears; changes in expenditures on durables reveal a degree of reversion consistent with the permanent income hypothesis, although this reversion occurs at a rate significantly slower than what is suggested by a frictionless permanent income hypothesis model. Copyright 1990, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Volume (Year): 105 (1990)
Issue (Month): 3 (August)
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