Abstract

http://ssrn.com/abstract=1269730
 
 

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


Hrishikesh D. Vinod


Fordham University - Department of Economics

August 17, 2008

Fordham University Department of Economics Discussion Paper No. 2008-13

Abstract:     
Consumer theory maximizes utility subject to a budget constraint, ignoring that the ratio of consumer debt to disposable income has varied between 30% and 130%. Granger-causality tests also confirm Consumption-precedence over income. We discuss features of newer US data allowing families greater control on the timing and level of income. Our 'target-seeking' Wiener-Hopf-Whittle optimization yields a two-equation system where both consumption and income are endogenous, similar to quantities and prices in a demand system. We resolve five old 'puzzles' from the consumer theory literature and provide estimates of shadow prices of the income level and adjustment costs.

Number of Pages in PDF File: 22

Keywords: Stochastic dynamic optimum, Target seeking, VAR, Wiener-Hopf Optimization, Causality Testing, Habit

JEL Classification: E21, E63

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Date posted: September 18, 2008  

Suggested Citation

Vinod, Hrishikesh D., Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy (August 17, 2008). Fordham University Department of Economics Discussion Paper No. 2008-13. Available at SSRN: http://ssrn.com/abstract=1269730

Contact Information

Hrishikesh D. Vinod (Contact Author)
Fordham University - Department of Economics ( email )
Dealy Hall
Bronx, NY 10458
United States
718-817-4065 (Phone)
718-817-3518 (Fax)
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