Tuesday, October 15, 2013

Memorable goods

In macroeconomics, one distinguishes between non-durable and durable consumption goods. This distinction is important, as the cyclical nature of the two is very different. Durables are very volatile, as households like to postpone their acquisition in recessions. Non-durables are extremely smooth, however. The later is what most models have in mind when thinking about consumption, while the first are more like investment goods, but at the household level.

Rong Hai, Dirk Krueger and Andrew Postlewaite think we should add a third category: memorable goods. These are non-durable goods that may not last long physically, but we keep good memories about them and thus they continue to provide utility in the future. In essence they are also durable goods, but they are not counted as such in national accounting. Some examples the authors provide are Christmas gifts whose memories last through the year. The same applies to vacations, going out, clothes, and jewelry. Using the consumption expenditure survey, the authors find that memorable goods lie somewhere between durables and non-durables in terms of cyclical properties. As they account for about 14% of outlays, their presence matters quantitatively. In fact, they can fully explain some observed deviations from the permanent income hypothesis. A paper to remember and cherish for a long time.


Anonymous said...

So, they essentially increased the proportion of durable goods to total private consumption. That is all there is to it?

Kansan said...

Measuring the share of those memorable goods is a contribution, and realizing that the increased share can explain a few unexplained things is another contribution. It may seem trivial in hindsight, but did you think of this before?