Disinflation, real income uncertainty and the demand for consumer durablesin a mean-variance model of portfolio selection

Survey evidence indicates that consumers only expect to be fractionally com pensated by the real income reduction of inflation. Incorporating this evid ence into a mean-variance model of portfolio selection, this paper shows th at demand for durables is a negative function of expected inflation and inc ome uncertainty. Using quarterly data for the USA and annual panel data for the OECD countries, empirical evidence shows that demand for durables is s ignificantly adversely affected by inflation and income uncertainty, and th at the recent disinflation has resulted in a significant increase in demand for durables.