Durables Consumption And A Solution Of Two Consumption Puzzles

In this thesis,we introduced durables into the consumption optimization problem on the basis of permanent income hypothesis(PIH)and Caballero(1990)'s model according to Gali(1993)'s method.By optimizing,we obtained the closed-form function of non-durables and durables consumption functions,based on which,we explained the two consumption puzzles:excess smoothness puzzle and excess sensitivity puzzle.Since Friedman(1957)brought up PIH,a lot of research was conducted to study its existence from both theoretical and empirical.Hall(1978)introduced stochastic process of income into PIH.Caballero(1990)introduced constant absolute risk aversion(CARA)utility into Hall(1978)'s model,founding that the existence of precautionary saving leads to the fail of PIH.However,Wang(2003)solved the general equilibrium on the basis of'Caballero(1990).This research proved that under special condition,PIH still holds.Empirically,the excess smoothness puzzle found by Campbell and Deaton(1989),as well as the excess sensitivity puzzle found by Flavin(1981)challenged PIH.Whether PIH holds,and how to explain the two consumption puzzles has become an important subject in consumption theories.This paper tries to explain the two consumption puzzles from the angle of durables.Based on Caballero(1990),we use Gali(1993)'s method to introduce durables to study consumption behavior,saving behavior,and risk asset investment behavior.In the benchmark,we assume the only resource of uncertainty comes from the shock of income,and the infinitely-lived consumer optimizes the utility in discrete time.This paper solves the closed-form solutions of non-durables and durables in this model,and obtains the dynamic process of consumption shock,as well as saving function.The consumption functions have some extension in permanent income part and shock part compared to Caballero(1990)'s:1.The consumption is related to discount sum of permanent income;2.The fraction that stems from depreciation;3.The consumption shock is an AR(1)process,while Caballero(1990)'s is a white noise.To discuss the two consumption puzzles,this paper conducts qualitative and quantitative analysis.Qualitatively,we prove that the consumptions in this model are more smooth and sensitive than those in PIH,hence prove that this model can account for the two consumption puzzles qualitatively.Quantitatively,we conduct calibration and compare the result to real economy,to test the degree of explanation.This paper provides a new explanation to the two consumption puzzles.Besides that,it obtains the closed-form consumption functions of durables and non-durables in two models,as well as saving functions.This research not only helps us to understand consumption theories related to PIH further,but also offers theoretical foundation to empirical research.