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CONSUMER DEMAND, CONSUMPTION, AND ASSET PRICING: AN INTEGRATED ANALYSIS WITH INTERTEMPORAL TWO-STAGE BUDGETING

Published online by Cambridge University Press:  16 July 2019

H. Youn Kim ,
Keith R. Mclaren  and
K. K. Gary Wong
H. Youn Kim*
Affiliation:
Western Kentucky University
Keith R. Mclaren
Affiliation:
Monash University
K. K. Gary Wong
Affiliation:
The University of Macau
*
Address correspondence to: H. Youn Kim, Department of Economics, Western Kentucky University, Bowling Green, KY 42101, USA. e-mail: [email protected].
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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.

Keywords

Indirect Utility FunctionEuler EquationsIntertemporal SubstitutionThe Stochastic Discount FactorConsumption-Based CAPM
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 2 , March 2021 , pp. 379 - 425
Copyright
© Cambridge University Press 2019

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Footnotes

We would like to thank the Associate Editor (Apostolos Serletis) and two referees for their helpful comments and suggestions to improve the paper.

References

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