This paper investigates the role of habits in the consumption function. Two types of habits are considered: rational and myopic, these being distinctions which have long been made in the literature on systems of demand equations. In both cases past consumption affects current preferences, thus breaking the intertemporal separability of preferences often assumed by economists. If habits are rational, consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution. If habits are myopic, consumers lack this awareness and this may result in a time inconsistency in their behaviour. We explore the consequences of these two types of habituation, both for traditional "solved-out" consumption functions and for consumption functions in the "Euler equation" form popularized by Hall (1978). The two types of habitual behaviour yield representations of the aggregate consumption function which are in principle observationally distinct. We estimate the Euler-equation form of the consumption function for quarterly United States data over the period 1954-1981. We also consider time aggregation and other specification issues, such as those posed by liquidity constraints.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
112.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.