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On the Dynamics of Dynamic Demand Models*

Published online by Cambridge University Press:  17 August 2016

Lester D. Taylor
Lester D. Taylor*
Affiliation:
University of Arizona
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Extract

Although dynamic models are now an important part of applied demand analysis, some of their fundamental concepts still suffer from a substantial lack of clarity. A particular case in point is the distinction between stock adjustment and habit formation in the Houthakker-Taylor model (1970). Empirical considerations prompted Houthakker and Taylor to specify a single state variable for each good and then to conclude that a good is habit forming or stock adjusting depending on the state variable's sign. However, besides having an obvious drawback of being ex post, this procedure is subject to the further criticism that, by treating expenditures for nondurables and services in the same way as expenditures for durables, it implicitly views habit formation and stock adjustment as arising from symmetrical processes. This is unfortunate, for stock adjustment and habit formation reflect intrinsically different phenomena, and to elaborate upon this, without the constraints imposed by thoughts of immediate empirical application, is one of the primary purposes of this paper.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 40 , Issue 1 , 1974 , pp. 21 - 31
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1974 

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Footnotes

*

Research supported by the National Science Foundation. I am grateful to Michael Manove, Gordon Sellon, and Daniel Weiserbs for comments on an earlier draft, to Philippe Rouzier for supervising the calculations of Section III, and to Elsa Bermudez and Kristine Maki for secretarial assistance.

References

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