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On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version

  • Rong Hai


    (Department of Economics, University of Chicago)

  • Andrew Postlewaite


    (Department of Economics, University of Pennsylvania)

  • Dirk Krueger


    (Department of Economics, University of Pennsylvania)

We propose a new category of consumption goods, memorable goods, that generate a flow of utility after consumption. We analyze an otherwise standard consumption model that distinguishes memorable goods from other nondurable goods. Consumers optimally choose lumpy consumption of memorable goods. We then empirically document significant differences between levels and volatilities of memorable and other nondurable good expenditures. In two applications we find that the welfare cost of consumption fluctuations driven by income shocks are significantly overstated if memorable goods are not accounted for and that estimates of excess sensitivity of consumption might be entirely due to memorable goods.

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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 14-012.

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Length: 74 pages
Date of creation: 23 Aug 2013
Date of revision: 15 Apr 2014
Handle: RePEc:pen:papers:14-012
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  1. Lusardi, Annamaria, 1996. "Permanent Income, Current Income, and Consumption: Evidence from Two Panel Data Sets," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 81-90, January.
  2. 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.
  3. Olga Gorbachev, 2011. "Did Household Consumption Become More Volatile?," American Economic Review, American Economic Association, vol. 101(5), pages 2248-70, August.
  4. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
  5. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  6. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, December.
  7. Martin Browning & Thomas F. Crossley, 2000. "Shocks, Stocks and Socks: Consumption Smoothing and the Replacement of Durables During an Unemployment Spell," Econometric Society World Congress 2000 Contributed Papers 0386, Econometric Society.
  8. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers wp173, University of Michigan, Michigan Retirement Research Center.
  9. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  10. Kerwin Kofi Charles & Melvin Stephens, Jr., 2006. "The Level and Composition of Consumption Over the Business Cycle: The Role of "Quasi-Fixed" Expenditures," NBER Working Papers 12388, National Bureau of Economic Research, Inc.
  11. Benjamin Malin & Dirk Krueger & Felix Kubler, 2007. "Computing Stochastic Dynamic Economic Models with a Large Number of State Variables: A Description and Application of a Smolyak-Collocation Method," NBER Working Papers 13517, National Bureau of Economic Research, Inc.
  12. Luis Rayo & Gary S. Becker, 2007. "Evolutionary Efficiency and Happiness," Journal of Political Economy, University of Chicago Press, vol. 115, pages 302-337.
  13. Erik Hurst & Mark Aguiar, 2008. "Deconstructing Lifecycle Expenditure," 2008 Meeting Papers 771, Society for Economic Dynamics.
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