DURABLE GOODS - AN EXPLANATION FOR THEIR SLOW ADJUSTMENT

At the microeconomic level, durable purchases are often discontinuous and relatively large. This feature has the potential to explain why aggregate expenditure on durables responds only slowly (relative to the frictionless permanent income model) to wealth and other aggregate innovations. In this paper I develop new results on the problem of dynamic aggregation of stochastically heterogeneous units, which help to characterize the connection between microeconomic behavior and aggregate dynamics in the presence of nonconvex adjustment costs. Using these results and splitting postwar U.S. aggregate durable purchases into different subcategories and time periods, I provide further support for the view that lumpy microeconomic purchases play an important role in explaining the time-series behavior of aggregate expenditure on durable goods.