Discussion Paper Series 2009-E-4

Consumption Smoothing without Secondary Markets for Small Durable Goods

Michio Suzuki

The purpose of this paper is to study whether trade frictions in durable goods markets help account for the patterns of household consumption expenditures observed in the Consumer Expenditure Survey (CEX), namely that the response of durable goods expenditures to income shocks is 78 percent larger than that of nondurable goods and the variance of the idiosyncratic part of log durable goods expenditures is four times as high as that of log nondurable goods expenditures. To do so, I develop a model with a continuum of households that purchase durable as well as nondurable goods. The key assumption is that durable goods cannot be rented or sold after purchase. By comparing stationary distributions of the model with and without trade frictions, I find that trade frictions are crucial in accounting for the expenditure patterns observed in the data.

Keywords: Durable Goods; Irreversibility; Consumption Insurance

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2009 Bank of Japan All Rights Reserved.

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