publication . Preprint . 2005

Mankiw's Puzzle on Consumer Durables: A Misspecification

Tam Bang Vu;
Open Access
  • Published: 01 Jan 2005
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 strengt...
Subjects
free text keywords: utility function, multiplicative disturbance, nonlinear ARMA(8,1) process, stochastic depreciation, misspecification error, jel:C52, jel:E21

= Cov(ln Ct , ln Zt+1) + Cov(ln Ct , vt+1) = Cov(ln Ct , ln Zt+1) < 0 , Var(ln Ct ) Var(ln Ct ) Var(ln Ct )

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