This paper integrates seemingly disjoint studies on consumer behavior in micro and macroanalyses via an intertemporal two-stage budgeting procedure with durable goods and liquidity constraints. The model specifies an indirect utility function as a function of nondurable consumption, commodity (nondurables) prices, and durables stock, and derives the demand functions for nondurable goods. A demand function for durable goods is derived in an adjustment cost framework. The consumption growth equation accounts for relative price effects with precautionary saving, durables stock, and liquidity constraints. The stochastic discount factor is approximated by a time-varying linear function of nondurable consumption growth, commodity price growth, durables stock growth, and disposable income growth. The demand functions for six nondurable goods and services are jointly estimated with the Euler equations for bonds, stocks, and durable goods with allowance for liquidity constraints, using US data. Estimation provides new findings for intertemporal consumption and a multifactor consumption-based capital asset pricing model.

This paper tests the optimality of consumption decisions at the aggregate level, taking into account popular deviations from the canonical constant-relative-risk-aversion (CRRA) utility function model—rule of thumb and habit. First, we provide extensive empirical evidence of the inappropriateness of linearization and testing strategies using Euler equations for consumption—a drawback for standard rule-of-thumb tests. Second, we propose a novel approach to testing for consumption optimality in this context: nonlinear estimation coupled with return aggregation, where rule-of-thumb behavior and habit are special cases of an all-encompassing model. We estimated 48 Euler equations using GMM. At the 5% level, we only rejected optimality twice out of 48 times. Moreover, out of 24 regressions, we found the rule-of-thumb parameter to be statistically significant only twice. Hence, lack of optimality in consumption decisions represent the exception, not the rule. Finally, we found the habit parameter to be statistically significant on four occasions out of 24.

This paper analyzes aggregate wealth based on separable risk aversion and intertemporal substitution. In an infinite-period overlapping-generations model with survival uncertainty, economic growth, and permanent and temporary income shocks, our closed-form solution permits us to derive rich behavioral conclusions and to assess the relative importance of the major components of aggregate wealth. In particular, the separation of the attitudes toward risk and substitution allows us to disentangle behaviors relating to the intertemporal substitution motive from behaviors relating to the precautionary motive.