IS CONSUMPTION GROWTH CONSISTENT WITH INTERTEMPORAL OPTIMIZATION - EVIDENCE FROM THE CONSUMER EXPENDITURE SURVEY

In this paper we show that some of the predictions of models of consum er intertemporal optimization are in line with the patterns of nondura ble expenditure observed in U.S. household-level data. We propose a fl exible specification of preferences that allows multiple commodities a nd yields empirically tractable equations. We estimate preference para meters using the only U.S. micro data set with complete consumption in formation. We show that previous rejections can be explained by the si mplifying assumptions made in previous studies. We also show that resu lts obtained using good consumption or aggregate data can be misleadin g.