a1 University of Pennsylvania CEPR and NBER
In this paper we investigate whether a standard life-cycle model in which households purchase nondurable consumption and consumer durables and face idiosyncratic income and mortality risk as well as endogenous borrowing constraints can account for two key patterns of consumption and asset holdings over the life cycle. First, consumption expenditures on both durable and nondurable goods are hump-shaped. Second, young households keep very few liquid assets and hold most of their wealth in consumer durables. In our model durables play a dual role: they both provide consumption services and act as collateral for loans. A plausibly parameterized version of the model predicts that the interaction of consumer durables and endogenous borrowing constraints induces durables accumulation early in life and higher consumption of nondurables and accumulation of financial assets later in the life cycle, of an order of magnitude consistent with observed data.
We would like to thank Andrew Atkeson, Michele Boldrin, Hal Cole, MariaCristina De Nardi, Narayana Kocherlakota, Lee Ohanian, Luigi Pistaferri, Edward Prescott, and Tao Zha, as well as an anonymous referee, for helpful comments. All remaining errors are our own.