Durable Goods and Consumer Behavior with Liquidity Constraints: Evidence from Norway

Youn Kim (), José Alberto Molina and Ka Wong ()
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Youn Kim: Western Kentucky University

No 1047, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper jointly analyzes consumer demand and consumption with allowance for durable goods and liquidity constraints. An indirect utility function is specified with the user cost of durable goods, and demand functions for nondurable and durable goods and a consumption growth equation are derived by incorporating liquidity constraints. The model is estimated for Norwegian consumers for 1979-2018, and results reveals that traditional demand analyses ignoring durable goods leads to a significant bias in the elasticities of nondurable goods. Durable goods are found to be necessities and price-inelastic like most nondurable goods. Norwegian consumers are, in general, impatient with low risk aversion. There is weak evidence for liquidity constraints, which have no important influence on consumption. No strong evidence exists for intertemporal substitution in consumption of nondurable and durable goods. However, there is a considerable effect of uncertainty on consumption, especially for durable goods, which can explain consumption/saving behavior during the current Covid pandemic.

Keywords: Indirect utility function; User cost of durable goods; Euler equation; Risk aversion; Intertemporal substitution (search for similar items in EconPapers)
JEL-codes: D12 D15 E21 (search for similar items in EconPapers)
Date: 2022-01-18
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-upt
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