Using Consumer Theory to Test Competing Business Cycle Models Mark Bils University of Rochester and National Bureau of Economic Research Peter J. Klenow University of Chicago and National Bureau of Economic Research Consumer theory suggests that expenditures on luxuries and dura- bles should be more cyclical than expenditures on necessities and nondurables. Estimating luxuriousness and durability for 57 con- sumer 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 cycli- cal 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, discriminat- ing in favor of cyclical utilization. I. Introduction Since Kydland and Prescott (1982), many researchers have given a central role to technology shocks in business cycles. The size and persistence of such shocks have often been estimated from observed changes in productivity. But Jorgenson and Griliches (1967) and We thank the National Science Foundation for financial support. We are grateful to Noh-Sun Kwark for his excellent research assistance and to Julie Nelson for pro- viding the reorganized Consumer Expenditure Survey data. We have benefited from helpful comments on earlier drafts by a referee, Lars Hansen, Janice Eberly, John Haltiwanger, and Valerie Ramey. [Journal of Political Economy, 1998, vol. 106, no. 2] ? 1998 by The University of Chicago. All rights reserved. 0022-3808/98/0602-0001$02.5() 233