Optimization Analysis of the U.S. Aggregate Consumption: A Goodness-of-Fit Approach

2017

ThIS paper exammes the hypothesIs of optlmlzmg behavIOr of the U S. consumers usmg quarterly and seasonally adjusted senes on real consumer expenditures on eIght commodIty groups. clothIng, durable goods, energy, food, hOUSIng, medIcal care, transportatIon, and other~ for the perIod of 1947 I through 1993 I. FolloWIng the Weak AXIom of Revealed Preference (W ARP), a money-metnc utIlIty functIon is derIved to calculate an effIcIency mdex to determme the percentage dIfference between the obscl ved cost of consumptIon and the optImum cost of consumption m each penod of the sample The empmcal resulb provide eVidence that the allocativc effiCIency 111 the U S ha~ improved only slIghtly due to the wave of deregulatlom m the early 1980s. Our results are COTI5lstent with the predIctIOns of the general theory of second best m showmg that gams In the allocattve effiCiency may be mll1lmal a~ long as many sectors of the economy remam partially or totally regulated

SSRN Electronic Journal, 2013

Swofford and Whitney (1987) investigated the validity of two types of assumptions that underlie the representative agent models of modern macroeconomics and monetary economics. These assumptions are utility maximization and weak or functional separability that is required for an economic aggregate to exist. To reinvestigate the structure of the representative consumer's preferences we develop a mixed integer programming revealed preference test with incomplete adjustment. We find that both a narrow official US monetary aggregate, M1, and a broad collection of assets are weakly separable. We further find that a modern analog of money as suggested by Friedman and Schwartz (1963) is also weakly separable. We also find that consumption goods and leisure are separable from all monetary goods. We find no evidence that official US M2 or MZERO are consistent with utility maximization and weak separability. That is, the assets in these measures do not meet the requirement for forming an aggregate over goods that is consistent with economic theory. Finally, we find that three broad categories of consumption goods, durables, nondurables and services, do not meet the weak separability conditions required for forming a consumption aggregate. However, a consumption aggregate of nondurables and services is weakly separable.

Journal of Political Economy, 1995

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading. 1 121 1122 JOURNAL OF POLITICAL ECONOMY nondurable expenditure observed in U.S. household-level data. Our results and our approach are new in several respects. First, we use the only U.S. micro data set that has direct and complete information on household consumption. The macroeconomic data sets used in most of the consumption literature so far contained either very limited information on consumption (like the Panel Study on Income Dynamics [PSID]) or none at all, in which case consumption had to be obtained indirectly from income and changes in assets. Second, we present empirical results that show that it is possible to find a reasonably simple specification of preferences that controls for the effects of changes in demographics and labor supply behavior over the life cycle and is not rejected by the available data. Third, we propose a flexible and novel specification of preferences that is easily estimable and allows a general treatment of multiple commodities. We show that a proper treatment of aggregation over commodities can be important, both theoretically and in practice.

1995

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading. 1 121 1122 JOURNAL OF POLITICAL ECONOMY nondurable expenditure observed in U.S. household-level data. Our results and our approach are new in several respects. First, we use the only U.S. micro data set that has direct and complete information on household consumption. The macroeconomic data sets used in most of the consumption literature so far contained either very limited information on consumption (like the Panel Study on Income Dynamics [PSID]) or none at all, in which case consumption had to be obtained indirectly from income and changes in assets. Second, we present empirical results that show that it is possible to find a reasonably simple specification of preferences that controls for the effects of changes in demographics and labor supply behavior over the life cycle and is not rejected by the available data. Third, we propose a flexible and novel specification of preferences that is easily estimable and allows a general treatment of multiple commodities. We show that a proper treatment of aggregation over commodities can be important, both theoretically and in practice.

Lecture Notes in Economics and Mathematical Systems, 2005

The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use.

This is a more rigorous and detailed version of a paper written for a Journal of Economic Perspectives symposium on consumption and saving behavior, for publication in the summer of 2001. The JEP version of the paper is intended for a general audience; the version here would be more appropriate for the consumption segment of a first-year graduate course, or more generally as an introduction to modern consumption theory for someone interested in beginning to pursue research in this area. To help new researchers get up to speed, the Mathematica programs that produced all of the theoretical results in this paper are available on the author's website, www.econ.jhu.edu/people/carroll.

2007

All types of consumer expenditures ultimately vie for the same pool of limited resources-the consumer's discretionary income. Consequently, consumers' spending in a particular industry can be better understood in relation to their expenditures in others. Although marketers may believe that they are operating in distinct and unrelated industries, it is important to understand how consumers, with a given budget, make trade-offs between meeting different consumption needs. For example, how much would escalating gas prices affect consumer spending on food and apparel? Which industries would gain most in terms of extra consumer spending as a result of a tax rebate? Answers to these questions are also important from a public policy standpoint because they provide insights into how consumer welfare would be affected as consumers reallocate their consumption budget in response to environmental changes. This study proposes a structural demand model to approximate the household budget allocation decision, in which consumers are assumed to allocate a given budget across a full spectrum of consumption categories to maximize an underlying utility function. The authors illustrate the model using Consumer Expenditure Survey data from the United States, covering 31 consumption categories over 22 years. The calibrated model makes it possible to draw direct inferences about the trade-offs individual households make when they face budget constraints and how their relative preferences for different consumption categories vary across life stages and income levels. The study also demonstrates how the proposed model can be used in policy simulations to quantify the potential impacts on consumption patterns due to shifts in prices or discretionary income.

Journal of Economic Perspectives, 2001

This is a more rigorous and detailed version of a paper written for a Journal of Economic Perspectives symposium on consumption and saving behavior, for publication in the summer of 2001. The JEP version of the paper is intended for a general audience; the version here would be more appropriate for the consumption segment of a first-year graduate course, or more generally as an introduction to modern consumption theory for someone interested in beginning to pursue research in this area. To help new researchers get up to speed, the Mathematica programs that produced all of the theoretical results in this paper are available on the author's website, www.econ.jhu.edu/people/carroll.

Empirical Economics, 1981

This paper developes a theoretical concept for mass consumer behaviour and tests it against data on private consumption in Austria for the period 1954-1974. It also tries to explain some attributes of major structural changes in the consumption patter n of the Austrian population. where r/t is the rate of removal and x/is current purchases. For non-durables and serv-4) If vj contains a set of heterogeneous commodities, pj is a weighted mean. Here we are abstracting from structural shifts within the aggregates.