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Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy

  • Hrishikesh D. Vinod

    (Fordham University, Department of Economics)

Consumer theory still maximizes utility subject to a budget constraint, when in fact 2008 data show that consumer debt is 130% of disposable income. Granger-causality tests confirm Consumption precedence over income. We discuss several features of newer US data, such as the ability to start /stop part-time /full time work /school, allowing families a greater control on the timing and level of income. Hence, our Wiener-Hopf-Whittle model uses 'target-seeking' optimization, while our two-equation system makes both consumption and income endogenous, similar to quantities and prices in a demand system. The new model provides estimates of shadow prices of income level and adjustment costs, and is shown to help resolve five old 'puzzles' from the consumer theory literature.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-13.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-13
Contact details of provider: Web page: http://www.fordham.edu/economics/
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  1. Karen E. Dynan & Douglas W. Elmendorf & Daniel E. Sichel, 2007. "The evolution of household income volatility," Finance and Economics Discussion Series 2007-61, Board of Governors of the Federal Reserve System (U.S.).
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  7. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 133-192, June.
  8. Bent E. Sørensen & Maria Jose Luengo-Prado, 2005. "What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?," Working Papers 2005-03, Department of Economics, University of Houston.
  9. Kasey Buckles, 2008. "Understanding the Returns to Delayed Childbearing for Working Women," American Economic Review, American Economic Association, vol. 98(2), pages 403-07, May.
  10. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  11. Bernanke, Ben S, 1984. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 587-614, August.
  12. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  13. Campbell, John Y, 1987. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 55(6), pages 1249-73, November.
  14. Árpád Ábrahám & Nicola Pavoni, 2005. "The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 370-381, 04/05.
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