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The Stochastic Behavior of Durable and Nondurable Consumption

  • Startz, Richard

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.

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Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 71 (1989)
Issue (Month): 2 (May)
Pages: 356-63

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Handle: RePEc:tpr:restat:v:71:y:1989:i:2:p:356-63
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