A Note on Stock-Flow Models of Consumer Behavior

Abstract

Since problems of stock-flow analysis have appeared repeatedly in recent discussions in monetary and consumer behavior theory,1 it may be appropriate at this time to formulate a fairly general stockflow model of consumer behavior, and to examine briefly some of its characteristic properties. Such investigation seems justified in view of the fact that certain aspects of stock-flow models have not been studied at all in the literature, including the only systematic work published in this area.2 The distinctive characteristics of consumer stock-flow models can be said to derive from the fact that in such models the consumer's market behavior in any period of time determines not only his level of consumption in the current period, but also the size of his stock holdings at the end of that period. Thus the consumer's behavior in the current period bears directly on his asset position as he enters the market in the following period, and this establishes a functional relationship between the consumer's actions in different periods of time. In the formulation presented below this intertemporal relationship is represented by a simple dynamic model. We examine the consumption pattern within the consumer's planning horizon, as well as the behavior of consumption over time as the consumer moves from one horizon to another. With respect to the latter it is shown that the assumption of superior goods guarantees the stability of the model. This result is shown to hold even if the consumer is allowed to revise his plans as time passes. The basic postulate of stock-flow consumer theory is, of course, the assumption that the consumer may derive utility from consum-