Italian household purchasing behaviour over the business cycle (1997-2004)

The key implication of the life cycle (LCH – Modigliani and Brumberg, 1954) and of the permanent income (PIH – Friedman, 1957) theories is that transitory variations in income, such as those arising from business cycle fluctuations, do not modify the purchasing behaviour of households which sustain, eventually, consumption either by running down assets and/or by incurring debt. Nevertheless, several empirical studies have shown that, due to capital market imperfections, during business cycle recession households, especially those with a severe overall economic situation, are, actually, forced to reduce the level of consumption of goods with more elastic demand. However, some questions still need an answer as far as Italian context is concerned: during the business cycle recession, do households modify their purchasing behaviour varying, apart from the expenditure level, the share of overall consumption devoted to each category of goods and services? That is, to what extent are household purchasing decisions concerning the share of overall consumption devoted to each category of goods and services consistent with the economic theories on the inter-temporal allocation of resources developed by Modigliani and Brumberg (1954) and by Friedman (1957)? With this objective in mind, it will be highlighted if and how much the composition of Italian household expenditures according to the COICOP divisions changed in the recession phase (2001-2004) with respect to that of expansion (1997-2000), applying, to the data from Italian Household Expenditure Surveys, the Correspondence Analysis for three-way tables (Escofier and Drouet, 1983).