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Consumption And Habits: Evidence From Panel Data

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Author Info
Raquel Carrasco ()
José M. Labeaga ()
J. David López-Salido ()

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Abstract

The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We use the test proposed by Meghir and Weber (1996) and estimate the within -period marginal rate of substitution between commodities, which is robust to the presence of liquidity constraints. To that end, we use a Spanish panel data set in which households are observed up to eight consecutive quarters. This temporal dimension is crucial, since it allows us to take into account time invariant unobserved heterogeneity across households (“fixed effects”) and, therefore, to investigate if the relationship between current and past consumption reflects habits or heterogeneity. Our results conf irm the importance of accounting for fixed effects when analyzing intertemporal consumption decisions allowing for time non-separabilities. Once fixed effects are controlled for and a proper set of instruments is used, the results yield supporting evidence of habit formation in the demand system of food at home, transport and services.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we023415.

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Date of creation: Jul 2002
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Handle: RePEc:cte:werepe:we023415

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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.:
  1. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Blackwell Publishing, vol. 60(3), pages 631-49, July. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
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  3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
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  5. repec:cup:macdyn:v:1:y:1997:i:2:p:312-32 is not listed on IDEAS
  6. Blundell, Richard & M. Stoker, Thomas, 1999. "Consumption and the timing of income risk," European Economic Review, Elsevier, vol. 43(3), pages 475-507, March. [Downloadable!] (restricted)
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  7. Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  10. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, vol. 91(3), pages 681-692, June. [Downloadable!] (restricted)
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  11. 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. [Downloadable!] (restricted)
  12. Attanasio, Orazio P & Browning, Martin, 1995. "Consumption over the Life Cycle and over the Business Cycle," American Economic Review, American Economic Association, vol. 85(5), pages 1118-37, December. [Downloadable!] (restricted)
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  13. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
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  14. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December. [Downloadable!] (restricted)
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  15. 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. [Downloadable!] (restricted)
  16. Christopher D. Carroll, 1991. "Buffer stock saving and the permanent income hypothesis," Working Paper Series / Economic Activity Section 114, Board of Governors of the Federal Reserve System (U.S.).
  17. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April. [Downloadable!] (restricted)
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  18. 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. [Downloadable!] (restricted)
  19. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March. [Downloadable!] (restricted)
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  20. Heckman, James J, 1991. "Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity," American Economic Review, American Economic Association, vol. 81(2), pages 75-79, May. [Downloadable!] (restricted)
  21. 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. [Downloadable!] (restricted)
  22. Robert E. Hall, 1987. "Consumption," NBER Working Papers 2265, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  23. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June. [Downloadable!] (restricted)
  24. 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. [Downloadable!] (restricted)
Full references

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.)

  1. Ian Crawford, 2007. "A nonparametric analysis of habits models," CeMMAP working papers CWP30/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
  2. Antoine Bommier & Bertrand Villeneuve, 2004. "Risk Aversion and the Value of Risk to Life," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Löfgren, Åsa, 2003. "The Effect of Addiction on Environmental Taxation in a First and Second-best world," Working Papers in Economics 91, Göteborg University, Department of Economics. [Downloadable!]
  4. Carlsson, Fredrik & Löfgren, Åsa, 2004. "Airline choice, switching costs and frequent flyer programs," Working Papers in Economics 123, Göteborg University, Department of Economics. [Downloadable!]
    Other versions:
  5. Christelis, Dimitris & Sanz-de-Galdeano, Anna, 2009. "Smoking Persistence Across Countries: An Analysis Using Semi-Parametric Dynamic Panel Data Models with Selectivity," IZA Discussion Papers 4336, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  6. Bommier, Antoine & Rochet, Jean-Charles, 2003. "Risk Aversion and Planning Horizon," IDEI Working Papers 204, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2004. [Downloadable!]
    Other versions:
  7. Löfgren, Åsa & Nordblom, Katarina, 2006. "The Importance of Habit Formation for Environmental Taxation," Working Papers in Economics 204, Göteborg University, Department of Economics. [Downloadable!]
  8. Aronsson, Thomas & Löfgren, Karl-Gustaf, 2006. "Welfare Equivalent NNP and Habit Formation," UmeÃ¥ Economic Studies 680, Umeå University, Department of Economics. [Downloadable!]
  9. Thunström, Linda, 2008. "Preference Heterogeneity and Habit Persistence: The Case of Breakfast Cereal Consumption," UmeÃ¥ Economic Studies 738, Umeå University, Department of Economics. [Downloadable!]
  10. Martin Browning & M. Dolores Collado, 2004. "Habits and Heterogeneity in Demands: a Panel Data Analysis," CAM Working Papers 2004-18, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
    Other versions:
  11. Juan Ayuso & Juan F. Jimeno & Ernesto Villanueva, 2007. "The effects of the introduction of tax incentives on retirement savings," Banco de España Working Papers 0724, Banco de España. [Downloadable!]
  12. Zhen, Chen & Wohlgenant, Michael K., 2006. "Food Safety and Habits in U.S. Meat Demand under Rational Expectations," 2006 Annual meeting, July 23-26, Long Beach, CA 21287, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  13. Zhen, Chen & Wohlgenant, Michael K., 2005. "Meat Demand under Rational Habit Persistence," 2005 Annual meeting, July 24-27, Providence, RI 19145, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  14. Matteo Iacoviello & Stefano Neri, 2007. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," Boston College Working Papers in Economics 659, Boston College Department of Economics, revised 23 Oct 2009. [Downloadable!]
    Other versions:
  15. Thunström, Linda, 2008. "Food Consumption, Paternalism and Economic Policy," UmeÃ¥ Economic Studies 739, Umeå University, Department of Economics. [Downloadable!]
  16. Mette Christensen, 2007. "Heterogeneity in consumer demands and the income effect: evidence from panel data," IFS Working Papers W07/16, Institute for Fiscal Studies. [Downloadable!]
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