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

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  • Hrishikesh D. Vinod

    (Fordham University, Department of Economics)

Abstract

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.

Suggested Citation

  • Hrishikesh D. Vinod, 2008. "Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy," Fordham Economics Discussion Paper Series dp2008-13, Fordham University, Department of Economics.
    • Handle: RePEc:frd:wpaper:dp2008-13
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Stochastic dynamic optimum; Target seeking; VAR; Wiener-Hopf-Whittle; Causality testing;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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