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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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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. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
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