Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
967272 | Journal of Monetary Economics | 2006 | 31 Pages |
Abstract
We examine a model that generalizes the standard buffer-stock model of saving to accommodate durables, nondurables, down payment requirements, and adjustment costs in the durables market. We find that nondurable consumption becomes more volatile relative to income as down payments 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 U.S. aggregate data. The result follows from a gradual adjustment of consumption to permanent income shocks when agents attempt to spread out the burden of down payments over time, compounded by slow adjustment due to transaction costs.
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Authors
MarÃa José Luengo-Prado,