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The Stochastic Behavior of Durable and Nondurable Consumption

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  • Startz, Richard

Abstract

The life cycle/permanent income hypothesis suggests that optimization by consumers should cause marginal utility to approximate a random walk. As a consequence, purchases of nondurable goods should also approximately follow a random walk and purchases of durable goods should approximately follow a white noise process. The univariate processes for nondurables and durables both appear to be random walks, which would confirm the LC/PIH for nondurables and reject it for durables. Adjustment costs and nonseparability between durables and nondurables are then added to the specification of utility. The resulting more general stochastic process is estimated and the data tend to support the existence of nonseparabilty, but not adjustment costs. While forecasts of durables are not fully informationally efficient, they do about as well as do forecasts of nondurables. The behavior of durable consumption purchases is shown to be consistent with the life cycle/permanent income hypothesis. Copyright 1989 by MIT Press.

Suggested Citation

  • Startz, Richard, 1989. "The Stochastic Behavior of Durable and Nondurable Consumption," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 356-363, May.
  • Handle: RePEc:tpr:restat:v:71:y:1989:i:2:p:356-63
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    Cited by:

    1. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, vol. 83(1), pages 37-52, January.
    2. repec:pri:wwseco:dp229 is not listed on IDEAS
    3. Pakos, Michal, 2004. "Asset Pricing with Durable Goods and Nonhomothetic Preferences," MPRA Paper 26167, University Library of Munich, Germany.
    4. Rosenberg, Joshua V. & Engle, Robert F., 2002. "Empirical pricing kernels," Journal of Financial Economics, Elsevier, vol. 64(3), pages 341-372, June.
    5. Lastrapes, William D. & Potts, Todd B., 2006. "Durable goods and the forward-looking theory of consumption: Estimates implied by the dynamic effects of money," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1409-1430, August.
    6. Vincenzo Merella & Stephen E. Satchell, 2014. "Technology Shocks and Asset Pricing: The Role of Consumer Confidence," Carlo Alberto Notebooks 352, Collegio Carlo Alberto.
    7. Michal Pakos, "undated". "Measuring Intratemporal and Intertemporal Substitutions When Both Income and Substitution Effects Are Present: The Role of Consumer Durables," GSIA Working Papers 2007-E29, Carnegie Mellon University, Tepper School of Business.
    8. Garcia, Rene & Renault, Eric & Semenov, Andrei, 2006. "Disentangling risk aversion and intertemporal substitution through a reference level," Finance Research Letters, Elsevier, vol. 3(3), pages 181-193, September.
    9. Nadenichek, Jon, 1999. "Consumer durable goods in an international real business cycle framework," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(2), pages 233-247.
    10. Kris Jacobs & Kevin Q. Wang, 2002. "Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns," CIRANO Working Papers 2002s-11, CIRANO.
    11. Andrei Semenov, 2003. "High-Order Consumption Moments and Asset Pricing," Working Papers 2003_4, York University, Department of Economics, revised Jan 2005.
    12. Vincenzo Merella & Steve Satchell, 2005. "The Impact of Consumer Confidence on Expected Utility Maximization: A Contribution to the Equity Premium Puzzle Literature," Birkbeck Working Papers in Economics and Finance 0525, Birkbeck, Department of Economics, Mathematics & Statistics.
    13. Engel, Charles & Wang, Jian, 2007. "International trade in durable goods: understanding volatility, cyclicality, and elastics," Globalization and Monetary Policy Institute Working Paper 03, Federal Reserve Bank of Dallas.

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