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Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy

Hrishikesh Vinod

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

Abstract: Consumer theory still maximizes utility subject to a budget constraint, when in fact 2008 data show that consumer debt is 130% of disposable income. Granger-causality tests confirm Consumption precedence over income. We discuss several features of newer US data, such as the ability to start /stop part-time /full time work /school, allowing families a greater control on the timing and level of income. Hence, our Wiener-Hopf-Whittle model uses 'target-seeking' optimization, while our two-equation system makes both consumption and income endogenous, similar to quantities and prices in a demand system. The new model provides estimates of shadow prices of income level and adjustment costs, and is shown to help resolve five old 'puzzles' from the consumer theory literature.

Keywords: Stochastic dynamic optimum; Target seeking; VAR; Wiener-Hopf-Whittle; Causality testing (search for similar items in EconPapers)
JEL-codes: E21 E63 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:frd:wpaper:dp2008-13

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