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Consumption and Habits: Evidence from Panel Data

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  • Raquel Carrasco
  • José M. Labeaga
  • J. David López-Salido

Abstract

The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by Meghir and Weber (1996) to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate whether the relationship between current and past consumption reflects habits or heterogeneity. Our results confirm the importance of accounting for fixed effects when analysing intertemporal consumption decisions allowing for time non-separabilities. Copyright 2005 Royal Economic Society.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0297.2004.00963.x
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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 115 (2005)
Issue (Month): 500 (01)
Pages: 144-165

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Handle: RePEc:ecj:econjl:v:115:y:2005:i:500:p:144-165

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  1. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
  2. Richard Blundell & Thomas M. Stoker, 1994. "Consumption and the timing of income risk," IFS Working Papers W94/09, Institute for Fiscal Studies.
  3. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
  5. Attanasio, O. & Weber, G., 1995. "Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey," Open Access publications from University College London http://discovery.ucl.ac.u, University College London.
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  7. Boldrin, Michele & Christiano, Lawrence J. & Fisher, Jonas D.M., 1997. "Habit Persistence And Asset Returns In An Exchange Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 312-332, June.
  8. repec:cup:macdyn:v:1:y:1997:i:2:p:312-32 is not listed on IDEAS
  9. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  10. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
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  13. Attanasio, Orazio P., 1999. "Consumption," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 11, pages 741-812 Elsevier.
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  16. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  17. Naik, Narayan Y & Moore, Michael J, 1996. "Habit Formation and Intertemporal Substitution in Individual Food Consumption," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 321-28, May.
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  22. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
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