Consumer Durables and (S, s) Policy: Evidence from Policy Data

• Main Authors: Hong, Ki seok, Sohn, Eun seung
• Format: Article
• Language: English
• Published: Korea Development Institute 2005-12-01
• Series: KDI Journal of Economic Policy
• Subjects: 내구재소비(Durable goods); (S; s)모형((S; s) model; 패널자료(panel data); 항상소득가설(permanent income hypothesis)
• Online Access: https://doi.org/10.23895/kdijep.2005.27.2.123
• ISSN: 2586-2995; 2586-4130

Using Korean household data, this paper examines how consumption of durable goods is determined. Previous studies report that the standard Permanent Income Hypothesis (PIH), while being broadly consistent with non-durable goods consumption, provides little explanation for durable goods consumption. In this paper, we consider the (S, s) model as an alternative to the standard PIH. The (S, s) model predicts that, because of fixed adjustment costs, consumers make no adjustment to the durable goods stock until deviation from the optimal level becomes large. When the adjustments are made, the durable goods stock attains the optimal level. In order to test this prediction, we examine the intra-temporal relationship between non-durable goods and durable goods consumption and intertemporal changes in durable goods consumption, using data from the Korean Household Panel Study. The results show that, while the standard PIH is rejected by the data, the (S, s) model is not.