NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Life-Cycle Permanent-Income Model and Consumer Durables

Avner Bar-Ilan, Alan S. Blinder

NBER Working Paper No. 2149
Issued in 1987
NBER Program(s):   EFG

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.

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Document Object Identifier (DOI): 10.3386/w2149

Published: Annales d'Economie et de Statistique No. 9,,, pp.71-91, Jan-March 1988

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