On the welfare cost of consumption fluctuations in the presence of memorable goods : [version october 17, 2013]

We propose a new classification of consumption goods into nondurable goods, durable goods and a new class which we call “memorable” goods. A good is memorable if a consumer can draw current utility from its past consumpt
We propose a new classification of consumption goods into nondurable goods, durable goods and a new class which we call “memorable” goods. A good is memorable if a consumer can draw current utility from its past consumption experience through memory. We construct a novel consumption-savings model in which a consumer has a well-defined preference ordering over both nondurable goods and memorable goods. Memorable goods consumption differs from nondurable goods consumption in that current memorable goods consumption may also impact future utility through the accumulation process of the stock of memory. In our model, households optimally choose a lumpy profile of memorable goods consumption even in a frictionless world. Using Consumer Expenditure Survey data, we then document levels and volatilities of different groups of consumption goods expenditures, as well as their expenditure patterns, and show that the expenditure patterns on memorable goods indeed differ significantly from those on nondurable and durable goods. Finally, we empirically evaluate our model’s predictions with respect to the welfare cost of consumption fluctuations and conduct an excess-sensitivity test of the consumption response to predictable income changes. We find that (i) the welfare cost of household-level consumption fluctuations may be overstated by 1.7 percentage points (11.9% points as opposed to 13.6% points of permanent consumption) if memorable goods are not appropriately accounted for; (ii) the finding of excess sensitivity of consumption documented in important papers of the literature might be entirely due to the presence of memorable goods.
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Metadaten
Author:Rong Hai, Dirk Krueger, Andrew Postlewaite
URN:urn:nbn:de:hebis:30:3-325013
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2013,24
Series (Serial Number):CFS working paper series (2013, 24)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/12/16
Issue:version october 17, 2013
Pagenumber:92
HeBIS PPN:349977356
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:D91 Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 Consumption; Saving; Wealth
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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