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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Find related papers by JEL classification: E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Ricardo Reis, 2004.
"Inattentive Consumers,"
Working Papers
135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
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