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Habit Persistence and Durability in Aggregate Consumption: Empirical Tests

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  • Wayne E. Ferson
  • George M. Constantinides

Abstract

Habit persistence in consumption preferences and durability of consumption goods are two hypotheses which imply time-nonseparability in the derived utility for consumption expenditures. We study a simple model with both effects, in which lagged consumption expenditures enter the Euler equation. Habit persistence implies that the coefficients on the lagged expenditures are negative, while durability implies positive coefficients. If both effects are present, then estimating the sign of the coefficients addresses the question as to which of the two effects is dominant. Earlier empirical work on monthly data supported the durability of consumption expenditures. We estimate and test the Euler equation using monthly, quarterly and annual data and find evidence that habit persistence dominates the effect of durability.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3631.

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Date of creation: Feb 1991
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Publication status: published as Journal of Financial Economics, Vol. 29, No. 2, pp. 199-240, (October 1991)
Handle: RePEc:nbr:nberwo:3631

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