ADJUSTMENT OF CONSUMERS DURABLES STOCKS - EVIDENCE FROM AUTOMOBILE PURCHASES

This paper tests an optimal (S, s) rule in household durable purchases and examines directly the resulting aggregate expenditure dynamics. T he observed decision rule responds to income uncertainty and growth as predicted by an (S, s) model resulting from transactions costs. Tests against liquidity constraints find that about half the households pur chase according to an optimal (S, s) rule. Aggregating the (S, s) rule over households produces a cross-section distribution of durables hol dings. The empirical distribution is similar to that predicted theoret ically, as is its response to aggregate shocks. Furthermore, simulatio ns of aggregate expenditure based on the household distribution exhibi t dynamics consistent with those observed in the 1980s.