Working Paper: NBER ID: w2149
Authors: Avner Barhan; Alan S. Blinder
Abstract: This paper presents an extension of the life-cycle permanent-income model of consumption to the case of a durable good whose purchase involves lumpy trans- actions costs. Where individual behavior is concerned, the implications of the model are different in some respects from those of standard consumption theory. Specifically, rather than choose an optimal path for the service flow from durables, the optimizing consumer will choose an optimal range and try to keep his service flow inside that range. The dynamics implied by this behavior is different from that of the stock adjustment model. Properties of aggregate durables consumption are derived by explicit aggregation. In particular, it is shown that expenditures on durables display very large short-run elasticity to changes in permanent income. Empirical tests of the sort suggested by Hall (1978) generally produce results that are in line with the predictions of the theory.
Keywords: Lifecycle Model; Permanent Income; Consumer Durables
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent Income Change (D11) | Durable Expenditures (E20) |
| Durable Expenditures (E20) | Consumer Behavior Dynamics (D19) |
| Permanent Income Change (D11) | Timing and Magnitude of Durable Goods Purchases (L68) |
| Durable Expenditures (E20) | Ratchet Effect in Consumer Behavior (D11) |
| Permanent Income Change (D11) | Short-Run Elasticity of Durable Expenditures (D12) |
| Permanent Income Change (D11) | Long-Run Elasticity of Durable Expenditures (D12) |