Fordham University Department of Economics Discussion Paper No. 2008-13
22 Pages Posted: 18 Sep 2008
Date Written: August 17, 2008
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: 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