Skip to main content
    • Aa
    • Aa
  • Get access
    Check if you have access via personal or institutional login
  • Cited by 32
  • Cited by
    This article has been cited by the following publications. This list is generated based on data provided by CrossRef.

    Aydilek, Asiye 2016. The allocation of time and puzzling profiles of the elderly. Economic Modelling, Vol. 53, p. 515.

    Browning, Martin Crossley, Thomas F. and Lührmann, Melanie 2016. Durable Purchases over the Later Life Cycle. Oxford Bulletin of Economics and Statistics, Vol. 78, Issue. 2, p. 145.

    Kolasa, Aleksandra and Rubaszek, Michał 2016. The effect of ageing on the European economies in a life-cycle model. Economic Modelling, Vol. 52, p. 50.

    Kraft, Holger Munk, Claus Seifried, Frank Thomas and Wagner, Sebastian 2016. Consumption habits and humps. Economic Theory,

    Krueger, Dirk and Ludwig, Alexander 2016. On the optimal provision of social insurance: Progressive taxation versus education subsidies in general equilibrium. Journal of Monetary Economics, Vol. 77, p. 72.

    Ortalo-Magné, François and Prat, Andrea 2016. Spatial Asset Pricing: A First Step. Economica, Vol. 83, Issue. 329, p. 130.

    Suzuki, Michio 2016. UNDERSTANDING THE COSTS OF CONSUMER DURABLE ADJUSTMENTS. Economic Inquiry, Vol. 54, Issue. 3, p. 1561.

    Wang, Haining Cheng, Zhiming and Smyth, Russell 2016. Language and consumption. China Economic Review, Vol. 40, p. 135.

    Xu, Shaofeng 2016. On the welfare cost of rare housing disasters. Journal of Economic Dynamics and Control, Vol. 69, p. 301.

    Zanin, Luca 2016. The effects of various motives to save money on the propensity of Italian households to allocate an unexpected inheritance towards consumption. Quality & Quantity,

    Berger, David and Vavra, Joseph 2015. Consumption Dynamics During Recessions. Econometrica, Vol. 83, Issue. 1, p. 101.

    Davis, Morris A. and Van Nieuwerburgh, Stijn 2015.

    Guler, Bulent 2015. Innovations in information technology and the mortgage market. Review of Economic Dynamics, Vol. 18, Issue. 3, p. 456.

    Jia, Ye George 2015. The impact of personal bankruptcy law on entrepreneurship. Canadian Journal of Economics/Revue canadienne d'économique, Vol. 48, Issue. 2, p. 464.

    Quadrini, Vincenzo and Ríos-Rull, José-Víctor 2015.

    Röhrs, Sigrid and Winter, Christoph 2015. Public versus private provision of liquidity: Is there a trade-off?. Journal of Economic Dynamics and Control, Vol. 53, p. 314.

    Zhang, Linwan Wu, Weixing Wei, Ying and Pan, Rulu 2015. Stock holdings over the life cycle: Who hesitates to join the market?. Economic Systems, Vol. 39, Issue. 3, p. 423.

    Chu, Yongqiang 2014. Credit constraints, inelastic supply, and the housing boom. Review of Economic Dynamics, Vol. 17, Issue. 1, p. 52.

    Dotsey, Michael Li, Wenli and Yang, Fang 2014. CONSUMPTION AND TIME USE OVER THE LIFE CYCLE. International Economic Review, Vol. 55, Issue. 3, p. 665.

    Fella, Giulio 2014. A generalized endogenous grid method for non-smooth and non-concave problems. Review of Economic Dynamics, Vol. 17, Issue. 2, p. 329.



  • Jesús Fernández-Villaverde (a1) and Dirk Krueger (a1)
  • DOI:
  • Published online: 16 March 2011

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.

Corresponding author
Address correspondence to: Dirk Krueger, Department of Economics, University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104, USA; e-mail:
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

J.M. Abowd and D. Card (1989) On the covariance structure of earnings and hours changes. Econometrica 57, 411445.

R. Aiyagari (1994) Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659684.

R. Alessie , M. Devereux , and G. Weber (1997) Intertemporal consumption, durables and liquidity constraints: A cohort analysis. European Economic Review 41, 3759.

F. Alvarez and U. Jermann (2000) Efficiency, equilibrium and asset pricing with risk of default. Econometrica 68, 775797.

O. Attanasio (1999) Consumption. In J. Taylor and M. Woodford (eds.), Handbook of Macroeconomics, vol. 1B. Amsterdam: Elsevier.

O. Attanasio and G. Weber (1995) Is consumption growth consistent with intertemporal optimization? Evidence for the consumer expenditure survey. Journal of Political Economy 103, 11211157.

C. Azariadis and L. Lambertini (2003) Endogenous debt constraints in lifecycle economies. Review of Economic Studies 70, 127.

L. Barrow and L. McGranahan (2000) The effects of the earned income credit on the seasonality of household expenditures. National Tax Journal 53, 12111244.

J. Berkovec and D. Fullerton (1992) A general equilibrium model of housing, taxes and portfolio choice. Journal of Political Economy 100, 390429.

R. Blundell , M. Browning , and C. Meghir (1994) Consumer demand and the life-cycle allocation of household expenditures. Review of Economic Studies 61, 5780.

C. Carroll (1997) Buffer-stock saving and the life cycle/permanent income hypothesis. Quarterly Journal of Economics 112, 155.

E. Chah , V. Ramey , and R. Starr (1995) Liquidity constraints and intertemporal consumer optimization: Theory and evidence from durable goods. Journal of Money, Credit and Banking 27, 272287.

M. Chambers , C. Garriga , and D. Schlagenhauf (2009a) Accounting for changes in the homeownership rate. International Economic Review 50, 677726.

M. Chambers , C. Garriga , and D. Schlagenhauf (2009b) The loan structure and housing tenure decisions in an equilibrium model of mortgage choice. Review of Economic Dynamics 12, 444468.

J. Cocco (2005) Portfolio choice in the presence of housing. Review of Financial Studies 18, 535567.

J. Cocco , F. Gomes , and P. Maenhout (2005) Consumption and portfolio choice over the life-cycle. Review of Financial Studies 18 (2), 491533.

J.C. Conesa and D. Krueger (1999) Social security reform with heterogeneous agents. Review of Economic Dynamics 2, 757795.

A. Deaton (1985) Panel data from time series of cross-sections. Journal of Econometrics 30, 109126.

A. Deaton (1991) Saving and liquidity constraints. Econometrica 59, 12211248.

A. Deaton (1992) Understanding Consumption. Oxford, UK: Oxford University Press.

A. Deaton. (1997) The Analysis of Households Surveys. Baltimore, MD: Johns Hopkins University.

A. Diaz and M. Luengo-Prado (2008) On the user cost and homeownership. Review of Economic Dynamics 11, 584613.

K.E. Dynan , J. Skinner , and S. Zeldes (2004) Do the rich save more? Journal of Political Economy 112, 397444.

J. Eberly (1994) Adjustment of consumers' durables stocks: Evidence from automobile purchases. Journal of Political Economy 102, 403436.

M. Eichenbaum and L.P. Hansen (1990) Estimating models with intertemporal substitution using aggregate time series data. Journal of Business and Economic Statistics 8, 5369.

M. Feldman and C. Gilles (1985) An expository note on individual risk without aggregate uncertainty. Journal of Economic Theory 35 (1), 2632.

J. Fernández-Villaverde and D. Krueger (2007) Consumption over the life cycle: Facts from the Consumer Expenditure Survey. Review of Economics and Statistics 89, 552565.

M. Flavin and T. Yamashita (2002) Owner-occupied housing and the composition of the household portfolio. American Economic Review 92, 345362.

P. Gottschalk and R. Moffitt (1994) The growth of earnings instability in the U.S. labor market. Brookings Papers on Economic Activity 1994, 217272.

P.O. Gourinchas and J. A. Parker (2002) Consumption over the life cycle. Econometrica 70, 4791.

S. Grossman and G. Laroque (1990) Asset pricing and optimal portfolio choice in the presence of illiquid durable consumption goods. Econometrica 58, 2551.

G.D. Hansen (1993) The cyclical and secular behavior of the labor input: Comparing efficiency units and hours worked. Journal of Applied Econometrics 8, 7180.

M. Huggett (1993) The risk-free rate in heterogeneous-agent incomplete-insurance economies. Journal of Economic Dynamics and Control 17, 953969.

E. Hurst and F. Stafford (2004) Home is where the equity is: Mortgage refinancing and household consumption. Journal of Money, Credit and Banking 36, 9851014.

T. Kehoe and D. Levine (1993) Debt constrained asset markets. Review of Economic Studies 60, 865888.

N. Kocherlakota (1996) Implications of efficient risk sharing without commitment. Review of Economic Studies 63, 595609.

D. Krueger and F. Perri (2006) Does income inequality lead to consumption inequality? Empirical findings and a theoretical explanation. Review of Economic Studies 73 (1), 163193.

P. Krusell and A. Smith (1998) Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 867896.

W. Li and R. Yao (2007) The life-cycle effects of house price changes. Journal of Money, Credit and Banking 39, 13751409.

M. Luengo-Prado (2006) Durables, nondurables, down payments and consumption excesses. Journal of Monetary Economics 53 (1), 15091539.

E.R. Rogerson McGrattan , and R. Wright (1997) An equilibrium model of business cycle with household production and fiscal policy. International Economic Review 38, 267290.

M. Ogaki and C.M. Reinhart (1998) Measuring intertemporal substitution: The role of durable goods. Journal of Political Economy 106, 10781098.

P. Rupert , R. Rogerson , and Randall Wright (1995) Estimating substitution elasticities in household production models. Economic Theory 6, 179193.

P. Silos (2007a) Housing, portfolio choice and the macroeconomy. Journal of Economic Dynamics and Control 31, 27742801.

P. Silos (2007b) Housing tenure and wealth distribution in life-cycle economies. B.E. Journal of Macroeconomics 7.

K. Storesletten , C. Telmer , and A. Yaron (2007) Asset Pricing with Idiosyncratic Risk and Overlapping Generations. Review of Economic Dynamics 10 (4), 519548.

G. Tauchen and R. Hussey (1991) Quadrature-based methods for obtaining approximate solutions to nonlinear asset pricing models. Econometrica 59, 371396.

F. Yang (2009) Consumption over the life cycle: How different is housing? Review of Economic Dynamics 12, 423443.

R. Yao and H. Zhang (2005) Optimal consumption and portfolio choices with risky housing and borrowing constraints. Review of Financial Studies 18, 197239.

S. Zeldes (1989) Consumption and liquidity constraints: An empirical investigation. Journal of Political Economy 97 (2), 305346.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *