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Durables, Nondurables, Down Payments and Consumption Excesses

  • Maria J. Luengo-Prado

    (Northeastern University)

We examine a model that generalizes the standard buffer-stock model of savings to accommodate durables, nondurables and a collateralized liquidity constraint, with and without adjustment costs in the durables market. Since there is no known analytical solution to the model, we solve it numerically. We find that nondurable consumption becomes more volatile as down payment requirements decrease at the individual and at the aggregate level. Moreover, for plausible parameter values the model can explain the excess smoothness and excess sensitivity observed in the U.S. economy. The results follow from a gradual adjustment of consumption to permanent income shocks in an attempt by agents to spread out the burden of down payments over time.

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Paper provided by EconWPA in its series Macroeconomics with number 0408006.

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Length: 45 pages
Date of creation: 10 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0408006
Note: Type of Document - pdf; pages: 45
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