Mankiw's Puzzle on Consumer Durables: A Misspecification

Tam Vu ()
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Tam Vu: Department of Economics, University of Hawaii at Manoa

No 200515, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: Mankiw (1982) shows that consumer durables expenditures should follow a linear ARMA(1,1) process, but the data analyzed supports an AR(1) process instead; thus, a puzzle. In this paper, we employ a more general utility function than Mankiw's quadratic one. Further, the disturbance and depreciation rate are respecified, respectively, as multiplicative and stochastic. The analytical consequence is a nonlinear ARMA(infinity,1) process, which implies that the linear ARMA(1,1) is a misspecification. A historical data analysis appears to support the nonlinear model. Since actual data are influenced by historical events, we also carry out a Monte Carlo study to strengthen our point

Keywords: utility function; multiplicative disturbance; nonlinear ARMA(8; 1) process; stochastic depreciation; misspecification error (search for similar items in EconPapers)
JEL-codes: C52 E21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005
New Economics Papers: this item is included in nep-upt
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