Habit Formation and Aggregate Consumption Dynamics

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53 citations0/0 files storedThe B E Journal of Macroeconomics

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Monetary Policy and Economic Impact Financial Literacy, Pension, Retirement Analysis Economic theories and models

Abstract

This paper finds that a benchmark model of habit formation in consumer preferences can explain two well-known failures of the permanent income hypothesis: the sensitivity of aggregate consumption to predictable changes in income and to lagged consumer sentiment. One novel feature of the paper's methodology is to allow for measurement errors and other transitory elements (for example, weather-related disturbances) in consumption data. In contrast with traditional wisdom, aggregate consumption growth appears to be highly persistent after controlling for measurement errors and transitory consumption fluctuations: the estimates of persistence in quarterly consumption growth jump up from the commonly assumed 0.3 to about 0.7.

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References

1978Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence 1981The Adjustment of Consumption to Changing Expectations About Future Income 2000Habit Formation in Consumption and Its Implications for Monetary-Policy Models 1998Asset pricing in production economies 2004Consumer Confidence and Consumer Spending 1991Habit persistence and durability in aggregate consumption 1993The Interaction Between Time-Nonseparable Preferences and Time Aggregation 2004A present value test of habits and the current account

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2020Sticky Expectations and Consumption Dynamics 2010Habit Persistence, Nonseparability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?2008International Evidence on Sticky Consumption Growth 2013THE PREDICTABILITY OF AGGREGATE CONSUMPTION GROWTH IN OECD COUNTRIES: A PANEL DATA ANALYSIS 2011Explaining U.S. consumer behavior with news sentiment

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