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Mankiw's Puzzle on Consumer Durables: A Misspecification

  • Tam Bang Vu

    ()

    (Department of Economics, University of Hawaii at Manoa)

Registered author(s):

    Mankiw (1982) shows that consumer durables expenditures should follow a linear ARMA(1,1) process, but the data analyzed supports an AR(1) process instead; thus, a puzzle. In this paper, we employ a more general utility function than Mankiw's quadratic one. Further, the disturbance and depreciation rate are respecified, respectively, as multiplicative and stochastic. The analytical consequence is a nonlinear ARMA(infinity,1) process, which implies that the linear ARMA(1,1) is a misspecification. A historical data analysis appears to support the nonlinear model. Since actual data are influenced by historical events, we also carry out a Monte Carlo study to strengthen our point

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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_05-15.pdf
    File Function: First version, 2005
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    Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 200515.

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    Length: 25 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:hai:wpaper:200515
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    1. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
    2. Mankiw, N Gregory, 1985. "Consumer Durables and the Real Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 353-62, August.
    3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    4. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
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