Durable goods and consumer behavior with liquidity constraints

By H. Youn Kim, José Alberto Molina, K. K. Gary Wong

Published in Scandinavian Journal of Economics

Abstract:

This paper presents an integrated model of intratemporal demand and intertemporal consumption, with allowance for durable goods and liquidity constraints. Demand equations for nondurable and durable goods, with the user cost of durable goods, and a consumption Euler equation incorporating liquidity constraints, are jointly estimated for Norwegian consumers from 1979 to 2018. Results show that demand analyses ignoring durable goods leads to a significant bias in the elasticities of nondurable goods. Norwegian consumers are found to be impatient, with low risk aversion. There is weak evidence for liquidity constraints in consumption. No strong evidence exists for intertemporal substitution in consumption, but a considerable effect of uncertainty is found in durable consumption.