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CONSUMPTION AND SAVING OVER THE LIFE CYCLE: HOW IMPORTANT ARE CONSUMER DURABLES?

Published online by Cambridge University Press:  16 March 2011

Jesús Fernández-Villaverde
Affiliation:
University of PennsylvaniaCEPR and NBER
Dirk Krueger*
Affiliation:
University of PennsylvaniaCEPR and NBER
*
Address correspondence to: Dirk Krueger, Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, USA; e-mail: dkrueger@econ.upenn.edu.

Abstract

In this paper we investigate whether a standard life-cycle model in which households purchase nondurable consumption and consumer durables and face idiosyncratic income and mortality risk as well as endogenous borrowing constraints can account for two key patterns of consumption and asset holdings over the life cycle. First, consumption expenditures on both durable and nondurable goods are hump-shaped. Second, young households keep very few liquid assets and hold most of their wealth in consumer durables. In our model durables play a dual role: they both provide consumption services and act as collateral for loans. A plausibly parameterized version of the model predicts that the interaction of consumer durables and endogenous borrowing constraints induces durables accumulation early in life and higher consumption of nondurables and accumulation of financial assets later in the life cycle, of an order of magnitude consistent with observed data.

Type
Vintage Article
Copyright
Copyright © Cambridge University Press 2011

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