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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
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