Flexible (S,s) Bands, Uncertainty, and Aggregate Consumer Durables

Janice Eberly

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Recent work in macroeconomics has suggested that (S,s) rules are a useful characterization of household purchases of durable goods, and that they provide a basis for expenditure dynamics consistent with those observed in aggregate data. The purpose of this paper is to determine whether a flexible (S,s) rule, that is, an inaction range that varies over time, provides a more complete characterization of the aggregate data. The results suggest that not only does a flexible rule bring additional explanatory power, but the manner in which the rule implicitly changes over time is highly cyclical and correlated with changes in financial volatility over the business cycle. These results provide an economic structure for the observations that durables purchases contract when consumer uncertainty increases.

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