Consumer Demand, Consumption, and Asset Pricing: An Integrated Analysis With Intertemporal Two-Stage Budgeting

Abstract

This paper integrates seemingly disjoint studies on consumer behavior in micro and macroanalyses via an intertemporal two-stage budgeting procedure with durable goods and liquidity constraints. The model specifies an indirect utility function as a function of nondurable consumption, commodity (nondurables) prices, and durables stock, and derives the demand functions for nondurable goods. A demand function for durable goods is derived in an adjustment cost framework. The consumption growth equation accounts for relative price effects with precautionary saving, durables stock, and liquidity constraints. The stochastic discount factor is approximated by a time-varying linear function of nondurable consumption growth, commodity price growth, durables stock growth, and disposable income growth. The demand functions for six nondurable goods and services are jointly estimated with the Euler equations for bonds, stocks, and durable goods with allowance for liquidity constraints, using US data. Estimation provides new findings for intertemporal consumption and a multifactor consumption-based capital asset pricing model.

Durable goods and consumer behavior with liquidity constraints

“…We consider a representative consumer who faces an optimal consumption problem of non-durable and durable goods over time. 5 This problem can be solved in two stages via intertemporal two-stage budgeting (Kim, 1993;Kim and McLaren, 2023). In the first stage, the level of consumption expenditure is chosen by optimally allocating wealth across periods.…”

“…To circumvent this problem, it is instead a common practice to work with the Euler equation in studies on consumption and saving (e.g., Hall, 1978; Ludvigson and Paxson, 2001), which is adopted here. To do so, we use the Euler equation for consumption () and exploit a lognormal property (Hansen and Singleton, 1983; Kim et al, 2021). Assuming that the quantity has a lognormal distribution and taking logs on both sides of equation (), we have where , the growth rate of the marginal utility of consumption.…”

“…The purpose of this study is to present an integrated model of consumer demand and consumption, with allowance for durable goods and liquidity constraints, which is then estimated to provide new evidence from Norwegian consumers. The model is based on the idea of intertemporal two‐stage budgeting that jointly accounts for the consumer's intratemporal and intertemporal choices (Kim and McLaren, 2023), with relative prices of non‐durable goods and the user cost of durable goods. The integrated model of consumer behavior embeds micro analysis of consumer demand within an intertemporal optimization problem by endogenizing consumption expenditure, and provides the micro‐foundational underpinnings to macro analysis of consumption by allowing for relative prices of non‐durable goods.…”

“…Moreover, there are studies employing intertemporal two‐stage budgeting, but they assume that capital markets are perfect, and do not allow for durable goods (Blundell et al, 1994). Kim et al (2021) generalize the intertemporal two‐stage budgeting, but do not utilize the user cost of durable goods, and thus the demand for durable goods is not explicitly analyzed.…”

“…We assume that durable goods are costlessly adjusted in a given period to facilitate the analysis. The use of annual data can provide a justification for such an assumption Kim et al (2021). found an insignificant effect of adjustment costs for durable goods in consumption.…”