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Consumer Durables and the Optimality of Usually Doing Nothing

  • Avner Bar-Ilan
  • Alan S. Blinder

This paper develops a simple but important point which is often overlooked: It is quite possible that the best policy for a rational, optimizing agent is to do nothing for long periods of time--even if new, relevant information becomes available. We illustrate this point using the market for durable goods. Lumpy costs in durables transactions lead consumers to choose a finite range, not just a single level, for their durables consumption. The boundaries of this range change with new information and, in general, obey the permanent income hypothesis. However, as long as the durable stock is within the chosen region, the consumer will not change her stock. Hence individuals will make durable transactions infrequently and their consumption can differ substantially from the prediction of the strict PIH. Such microeconomic behavior means that aggregate data cannot be generated by a representative agent; explicit aggregation is required. By doing that, we showed that time series of durable expenditures should be divided to two separate series: One on the average expenditure per purchase and the other on the number of transactions. The predictions of the PIH hold for the former, but not for the latter. For example, the short-run elasticity of the number of purchases with respect to permanent income Is much larger than one for plausible parameter values. We put our theory to a battery of empirical tests. Although the tests are by no means always consistent with the theory, most empirical results are in line with our predictions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2488.

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Date of creation: Dec 1987
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Publication status: published as Journal of Money, Creit , and Banking Volume 24, No. 2, pp.258-272 May 1992
Handle: RePEc:nbr:nberwo:2488
Note: EFG
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  1. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November.
  2. John Y. Campbell, 1986. "Does Saving Anticipate Declining Labor Income? An Alternative Test of the Permanent Income Hypothesis," NBER Working Papers 1805, National Bureau of Economic Research, Inc.
  3. Friedman, Benjamin M., 1979. "Optimal expectations and the extreme information assumptions of `rational expectations' macromodels," Journal of Monetary Economics, Elsevier, vol. 5(1), pages 23-41, January.
  4. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  5. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  6. Alan S. Blinder, 1978. "Temporary Income Taxes and Consumer Spending," NBER Working Papers 0283, National Bureau of Economic Research, Inc.
  7. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  8. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  9. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
  10. Flemming, J S, 1969. "The Utility of Wealth and the Utility of Windfalls," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 55-66, January.
  11. 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.
  12. Alan S. Blinder, 1981. "Retail Inventory Behavior and Business Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 443-520.
  13. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
  14. 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.
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