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What explains consumption in the very short-run? Evidence from checking account data

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  • Fusaro, Marc Anthony
  • Dutkowsky, Donald H.
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    Abstract

    This paper investigates consumption behavior within an intertemporal optimization model of the representative household. Our dataset consists of deposits and withdrawals from individual household checking accounts that received paychecks by direct deposit. We construct samples of panel data for households with weekly, biweekly, and semi-monthly pay-periods and form two different measures of consumption for each sample. GMM estimates of structural parameters provide mixed evidence for habit formation or durability and limited support for the permanent income hypothesis. The results instead point to “rule of thumb” consumption under liquidity constraints, where the household consumes its current disposable income each pay-period with possible debt servicing. These findings are uniform with regard to estimation of sub-samples split according to age or household income.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 33 (2011)
    Issue (Month): 4 ()
    Pages: 542-552

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    Handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:542-552

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Household consumption; Habit formation; Durability; “Rule of thumb” consumption; Liquidity constraints; Checking account data;

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    1. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    2. Alessandra Guariglia, 2002. "Consumption, habit formation, and precautionary saving: evidence from the British Household Panel Survey," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 1-19, January.
    3. Hafedh Bouakez & Emanuela Cardia & Francisco J. Ruge-Murcia, 2002. "Habit Formation and the Persistence of Monetary Shocks," Working Papers 02-27, Bank of Canada.
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    6. Alessie, Rob & Lusardi, Annamaria, 1997. "Consumption, saving and habit formation," Economics Letters, Elsevier, vol. 55(1), pages 103-108, August.
    7. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
    8. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, September.
    9. Alessie, R.J.M. & Teppa, F., 2002. "Saving and Habit Formation: Evidence from Dutch Panel Data," Discussion Paper 2002-62, Tilburg University, Center for Economic Research.
    10. Raymund Abara, 2006. "Estimation and evaluation of asset pricing models with habit formation using Philippine data," Applied Economics Letters, Taylor & Francis Journals, vol. 13(8), pages 493-497.
    11. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
    12. Jeffery D. Amato & Thomas Laubach, 2001. "Implications of habit formation for optimal monetary policy," Finance and Economics Discussion Series 2001-58, Board of Governors of the Federal Reserve System (U.S.).
    13. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    14. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
    15. 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.
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    Cited by:
    1. Michael Cohen & Marc Rysman, 2012. "Payment choice with consumer panel data," Working Papers 13, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    2. John C. Driscoll & Steinar Holden, 2014. "Behavioral Economics and Macroeconomic Models," CESifo Working Paper Series 4785, CESifo Group Munich.
    3. Michael Cohen & Marc Rysman, 2013. "Payment choice with consumer panel data," Working Papers 13-6, Federal Reserve Bank of Boston.

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