Using Consumer Theory to Test Competing Business Cycles Models

Consumer theory suggests that expenditures on luxuries and durables should be more cyclical than expenditures on necessities and nondurables. Estimating luxuriouseness and durability for 57 consumer goods, we confirm this prediction in U.S. data. We exploit this finding to test predictions of cyclical utilization and increasing returns models of business cycles. Both models predict more cyclical productivity for durable luxuries, a prediction borne out in the data. The utilization model predicts procyclical relative prices for durables and luxuries; the increasing returns model does not. Prices are more procyclical for durables and luxuries, discriminating in favor of cyclical utilization.