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Consumption, habit persistence, imperfect information and the lifetime budget constraint

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  • Willman, Alpo

Abstract

Based on the households' utility maximisation, a closed form approximation of the consumption function is derived and the deep parameters of the consumption function are estimated using aggregate euro area data. The novel element in our approach is the parameterisation of the information content regarding future income changes. In addition to the information regarding time series properties of the historical development of labour income, consumers have also period-specific information on future income realisations. Estimation results support the hypothesis that, although front-loaded, consumers have a lot of information on future income changes, but that also lagged consumption, through habit formation, plays an important role. JEL Classification: D12, E21

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0251.

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Date of creation: Aug 2003
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Handle: RePEc:ecb:ecbwps:20030251

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Keywords: Consumption; life-cycle hypothesis; wealth;

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References

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Cited by:
  1. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
  2. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  3. Kuismanen, Mika & Pistaferri, Luigi, 2006. "Information, habits, and consumption behavior: evidence from micro data," Working Paper Series 0572, European Central Bank.
  4. Willman, Alpo, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series 0765, European Central Bank.

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