Smooth it Like the ‘Joneses’? Estimating Peer‐Group Effects in Intertemporal Consumption Choice

Recent theoretical contributions have suggested peer‐group effects as a potential explanation for several puzzles in macroeconomics but their empirical relevance for intertemporal consumption choice is an open question. We derive an extension of the standard life‐cycle model that allows for consumption externalities. In this framework, we propose a social multiplier approach to distinguish true externalities from merely correlated effects. Estimating our model using US panel data, we find strong predictable co‐movement of household consumption within peer groups. Although much of this co‐movement reflects correlated effects only, there is statistically significant evidence for moderate consumption externalities across several plausible peer‐group specifications.