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Consumption, durable goods, and transaction costs

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  • Robert F. Martin

Abstract

We study consumption of durable and nondurable goods when the durable good is subject to transaction costs. In the model, agents derive utility from a service flow of a durable good and a consumption flow of a nondurable good. The key feature of the model is the existence of a fixed transaction cost in the durable good market. The fixed cost induces an inaction region in the purchase of the durable good. More importantly, the inability to adjust the durable stock induces variation in consumption of the nondurable good over the inaction region. The variation is a function of the degree of complementarity between durable and nondurable goods in the period utility function, the rate of intertemporal substitution, and a precautionary motive induced by incomplete markets. We test the model using the PSID. Housing serves as the durable good. The data indicate an increase in consumption before moving to a smaller house and a decrease in consumption before moving to a larger house. This result is consistent with the model when there exists complementarity between the durable and nondurable good or when there is a strong precautionary effect.

Suggested Citation

  • Robert F. Martin, 2003. "Consumption, durable goods, and transaction costs," International Finance Discussion Papers 756, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:756
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nikola Kojucharov & Clyde F. Martin & Robert F. Martin & Lili Xu, 2009. "The subprime mortgage crisis: irrational exuberance or rational error?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    2. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, vol. 157(1), pages 1-48, March.
    3. Raj Chetty, 2004. "Consumption Commitments, Unemployment Durations, and Local Risk Aversion," NBER Working Papers 10211, National Bureau of Economic Research, Inc.
    4. repec:esx:essedp:718 is not listed on IDEAS
    5. Fernández-Villaverde, Jesús & Krueger, Dirk, 2011. "Consumption And Saving Over The Life Cycle: How Important Are Consumer Durables?," Macroeconomic Dynamics, Cambridge University Press, vol. 15(05), pages 725-770, November.
    6. repec:esx:essedp:712 is not listed on IDEAS
    7. Raj Chetty & Adam Szeidl, 2016. "Consumption Commitments and Habit Formation," Econometrica, Econometric Society, vol. 84, pages 855-890, March.
    8. Robert F. Martin Joseph W. Gruber, 2004. "Does Housing Wealth Make Us Less Equal? The Role of Durable Goods in the Distribution of Wealth," Econometric Society 2004 North American Summer Meetings 15, Econometric Society.
    9. Viviana Fernández, 2002. "What Drives Replacement of Durable Goods at the Micro Level?," Documentos de Trabajo 122, Centro de Economía Aplicada, Universidad de Chile.
    10. Joseph Nichols, 2004. "A Life-cycle Model with Housing, Portfolio Allocation, and Mortgage Financing," Econometric Society 2004 North American Winter Meetings 205, Econometric Society.
    11. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Imputing consumption in the PSID using food demand estimates from the CEX," IFS Working Papers W04/27, Institute for Fiscal Studies.
    12. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 831-877.
    13. Joseph B. Nichols, 2007. "Nominal mortgage contracts and the effects of inflation on portfolio allocation," Finance and Economics Discussion Series 2007-67, Board of Governors of the Federal Reserve System (U.S.).
    14. Bonnet, Carole & Gobillon, Laurent & Laferrère, Anne, 2010. "The effect of widowhood on housing and location choices," Journal of Housing Economics, Elsevier, vol. 19(2), pages 94-108, June.
    15. Joseph W. Gruber & Robert F. Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers 773, Board of Governors of the Federal Reserve System (U.S.).
    16. Jonathan Halket & Santhanagopalan Vasudev, 2014. "Saving Up or Settling Down: Home Ownership over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(2), pages 345-366, April.
    17. Morris A. Davis & Robert F. Martin, 2005. "Housing, house prices, and the equity premium puzzle," Finance and Economics Discussion Series 2005-13, Board of Governors of the Federal Reserve System (U.S.).
    18. Adam Szeidl & Raj Chetty, 2005. "Consumption Commitments: Neoclassical Foundations for Habit Formation," 2005 Meeting Papers 122, Society for Economic Dynamics.
    19. Stefano Corradin & José L. Fillat & Carles Vergara-Alert, 2014. "Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 823-880.

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    Keywords

    Consumption (Economics) ; Econometric models;

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