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Obsolescence of Durable Goods and Optimal Consumption

  • Dmitriy Stolyarov
  • Ennio Stacchetti

We study a model with a durable good subject to abrupt, periodic obsolescence, and characterize the optimal purchasing policy. Consumers optimally synchronize new purchases with the arrival of new durable models. Hence, some agents use a "flexible" optimal replacement rule that switches between two adjacent replacement frequencies at irregular intervals. These agents react to wealth shocks by changing the timing of future purchases. The model has distinct comparative statics on obsolescence and durability and can explain how durables with high depreciation rates may have more volatile expenditure. The model also predicts how demand fluctuations respond to a change in product variety. These predictions match the observed changes in volatility of the US auto sales after the introduction of smaller foreign cars in the 1970s

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 312.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:312
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  1. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  2. Janice C. Eberly, . "Adjustment of Consumers' Durables Stocks: Evidence from Automobile Purchases," Rodney L. White Center for Financial Research Working Papers 22-91, Wharton School Rodney L. White Center for Financial Research.
  3. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
  4. Caballero, R.J., 1994. "Explaining Investment Dynamics in U.S. Manufacturing: Generalized (S,s) Approach," Working papers 94-32, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Attanasio, Orazio P, 2000. "Consumer Durables and Inertial Behaviour: Estimation and Aggregation of (S, s) Rules for Automobile Purchases," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 667-96, October.
  6. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  7. repec:tpr:qjecon:v:105:y:1990:i:3:p:727-43 is not listed on IDEAS
  8. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
  9. Christopher D. Carroll & Wendy E. Dunn, 1997. "Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets," NBER Working Papers 6081, National Bureau of Economic Research, Inc.
  10. John V. Leahy & Joseph Zeira, 2005. "The Timing of Purchases and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 1127-1151.
  11. Jerome Adda & Russell Cooper, 2000. "The Dynamics of Car Sales: A Discrete Choice Approach," NBER Working Papers 7785, National Bureau of Economic Research, Inc.
  12. Andrew Caplin & John Leahy, 1999. "Durable Goods Cycles," NBER Working Papers 6987, National Bureau of Economic Research, Inc.
  13. Bar-Ilan, Avner & Blinder, Alan S, 1992. "Consumer Durables: Evidence on the Optimality of Usually Doing Nothing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(2), pages 258-72, May.
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