USING CONSUMER THEORY TO TEST COMPETING BUSINESS-CYCLE MODELS

Consumer theory suggests that expenditures on luxuries and durables sh ould be more cyclical than expenditures on necessities and nondurables . Estimating luxuriousness and durability for 57 consumer goods, we co nfirm this prediction in U.S. data. We exploit this finding to test pr edictions of cyclical utilization and increasing returns models of bus iness cycles. Both models predict more cyclical productivity for durab le luxuries, a prediction borne out in the data. The utilization model predicts procyclical relative prices for durables and luxuries; the i ncreasing returns model does not. Prices are more procyclical for dura bles and luxuries, discriminating in favor of cyclical utilization.