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Modelling with flexibility through the business cycle: using a panel smooth transition model to test for the lipstick effect

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  • Wenying Li
  • Chen Zhen
  • Jeffrey H. Dorfman

Abstract

Consumer spending typically declines during periods of economic distress, but observers have noted that lipstick purchases appear to increase during recessions, which is often referred to as the lipstick effect. However, the existence of such effect has remained empirically unconfirmed. Using weekly retail scanner data on lipstick sales from 2006 to 2016 in the United States, we applied a Panel Smooth Transition Regression (PSTR) demand model to test the relationship between economic distress and lipstick sales. This flexible demand specification allows regression coefficients to vary as a function of an exogenous macroeconomic variables and fluctuate asymmetrically, non-linearly, and time-varyingly across an unlimited number of regimes. Empirical results show the income elasticity of demand for lipstick decreased rapidly from 0.31 to 0.05 during the 2007–2009 recession, then slowly rebounded to 0.31 by the second quarter of 2014, thus first empirically confirming the existence of the lipstick effect.

Suggested Citation

  • Wenying Li & Chen Zhen & Jeffrey H. Dorfman, 2020. "Modelling with flexibility through the business cycle: using a panel smooth transition model to test for the lipstick effect," Applied Economics, Taylor & Francis Journals, vol. 52(25), pages 2694-2704, May.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:25:p:2694-2704
    DOI: 10.1080/00036846.2019.1693701
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    Cited by:

    1. Li, Guangchen & Wei, Weixian, 2021. "Financial development, openness, innovation, carbon emissions, and economic growth in China," Energy Economics, Elsevier, vol. 97(C).

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