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UK Consumers’ Habits

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Author Info
Ryan Banerjee
Nicoletta Batini

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Abstract

We follow Fuhrer (2000) in estimating via Maximum Likelihood a log-linear consumption function on UK data. In doing so we consider various habit formation assumptions. We show that a model of purely “external” habits as in Fuhrer (2000) fits the UK data remarkably well, and possibly in a superior way than US data where, according to our estimates, consumers’ habits look more “internal” in that they appear indexed to past average consumption of only a subset of (peer) consumers in the economy, rather than total past per capita consumption. We also find that for about one seventh of UK consumers, current consumption equals current income_a strong violation of the permanent income hypothesis. Embedded in a sticky price-sticky inflation open-economy monetary model, the model that we estimate helps mimic the hump-shaped response of the output gap to income and interest rate shocks observed in the UK. Estimates of output Euler equations for the UK using a similar method agree with our general results. The consumption and output models that we estimate forecast significantly better than unrestricted open-economy VARs.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 13.

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Date of creation: 2003
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Handle: RePEc:mpc:wpaper:13

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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.:
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  2. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October. [Downloadable!] (restricted)
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  3. 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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  4. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
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  6. 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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  7. 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)
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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. Alessandro Flamini, 2004. "Inflation Targeting and Exchange Rate Pass-Through," HEI Working Papers 04-2004, Economics Section, The Graduate Institute of International Studies. [Downloadable!]
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  2. Lavan Mahadeva & Alex Muscatelli, 2005. "National Accounts Revisions and Output Gap Estimates in a Model of Monetary Policy with Data Uncertainty," Discussion Papers 14, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
  3. Nicoletta Batini & Paul Levine, 2004. "Robust Control Rules to Shield Against Indeterminacy," Computing in Economics and Finance 2004 339, Society for Computational Economics. [Downloadable!]
  4. Dibartolomeo, Giovanni & Rossi, Lorenza & Tancioni, Massimiliano, 2004. "Monetary Policy under Rule-of-Thumb Consumers and External Habits: An International Empirical Comparison," MPRA Paper 1094, University Library of Munich, Germany, revised Jun 2006. [Downloadable!]
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