The allocation of after-tax income and other available funds : a linkage of demand systems and macroeconomics

Abstract

This study focuses on the allocation of alternative measures of available funds to broad groups of expenditure categories. These alternative measures are compared against the traditional measure of total expenditure in a demand systems context. In this analysis, savings and debt repayment is included as an expenditure category. The inclusion of savings and debt repayment allows interest rates, along with income and prices, to be a direct link between the consumer and the macroeconomy. This feature differentiates this model specification from versions of Lluch's Extended Linear Expenditure System, the typical functional form used to link consumers and the macroeconomy. Data for this study came from the Consumer Expenditure Survey distributed by the Bureau of Labor Statistics, the Bureau of Labor Statistics Detailed Monthly Price Report, and the Survey of Consumer Finances distributed by the Federal Reserve Bank. Information from all these sources was merged together using demographic information to form one "master" data set for individual households; this merging process is unique for demand analysis. The quadratic expenditure system was employed as the primary functional form for this study. The expenditure categories considered were food at home; food away from home; housing; apparel; energy; health care; transportation; miscellaneous expenditure; and savings and debt repayment. The own-price elasticities were negative and typically in the inelastic range as expected for broad aggregate categories. The measure of available funds used did not generally effect the magnitude of the own-price elasticities. The expenditure elasticities were positive, again as expected. However, estimates of expenditure elasticities for consumption categories tended to decrease with broader definitions of available funds. Marginal budget shares of the expenditure categories also changed in magnitude with alternative measures of available funds. Finally, in agreement with previous studies, uncompensated cross-price effects on the level of savings and debt repayment were uniformly negative and small in magnitude...