Intertemporal Consumption and Consumer Demand

This paper integrates two strands of studies on consumer demand and consumption and provides a unified framework for analyzing consumer behavior employing an intertemporal two-stage budgeting procedure. We take a modified AIDS framework for the demand system and derive a general Euler equation by allowing for life-cycle behavior and precautionary saving. We also investigate liquidity constraints and habit formation in consumption behavior. The demand system and the Euler equation constitute a system of recursive equations with cross-equation parameter restrictions. The system is estimated jointly taking explicit account of model-compatible autocorrelation