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Habit Formation and Aggregate Consumption Dynamics

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  • Sommer Martin

    ()
    (International Monetary Fund)

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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File URL: http://www.degruyter.com/view/j/bejm.2007.7.1/bejm.2007.7.1.1444/bejm.2007.7.1.1444.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 7 (2007)
Issue (Month): 1 (August)
Pages: 1-25

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Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:21

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Web page: http://www.degruyter.com

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Cited by:
  1. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
  2. Carroll, Christopher D. & Slacalek, Jirka & Sommer, Martin, 2008. "International evidence on sticky consumption growth," CFS Working Paper Series 2008/09, Center for Financial Studies (CFS).
  3. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  4. Cardi, Olivier & Müller, Gernot J., 2011. "Habit formation and fiscal transmission in open economies," Journal of International Economics, Elsevier, vol. 85(2), pages 256-267.
  5. Liping Gao & Hyeongwoo Kim & Yaoqi Zhang, 2013. "Revisiting the Empirical Inconsistency of the Permanent Income Hypothesis: Evidence from Rural China," Auburn Economics Working Paper Series auwp2013-05, Department of Economics, Auburn University.
  6. Saten Kumar & Barrett Owen, 2013. "Financial Crisis and Sticky Expectations," Working Papers 2013-05, Auckland University of Technology, Department of Economics.
  7. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
  8. Lorenzo Pozzi, 2011. "The Time-Varying Volatility of Earnings and Aggregate Precautionary Savings," Tinbergen Institute Discussion Papers 11-144/2, Tinbergen Institute.

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