Adjustment Costs, Durables, and Aggregate Consumption

By Ben S. Bernanke
1982| Working Paper No. 667

Previous tests of the permanent income hypothesis (PIH) have focused on either nondurables or durables expenditures in isolation. This paper studies consumer purchases of nondurables and durables as the outcome of a single optimization problem. It is shown that the presence of adjustment costs of changing durables stocks may substantially affect the time series properties of both components of expenditure under the PIH. However, econometric tests based on this model do not contradict earlier rejections of the PIH in aggregate quarterly data.