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

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

22 Pages Posted: 18 Sep 2008  

Hrishikesh D. Vinod

Fordham University - Department of Economics

Date Written: August 17, 2008

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.

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

JEL Classification: E21, E63

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: https://ssrn.com/abstract=1269730

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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