Habits, Rationality and Myopia in the Life Cycle Consumption Function
This paper considers the effect both on solved out forward looking consumption functions and on Euler equations of two alternative hypotheses about habits: rational habits assume that consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution; under myopic habits, they are not aware. Demand systems evidence suggests there are important habits effects for most consumption goods, but time series models of aggregate consumption have found only a low degree of habit persistence, a result confirmed here by an analysis of quarterly U.S. data based on Euler equations. Taken together the evidence appears to favour the hypothesis of myopic habits.
Volume (Year): (1988)
Issue (Month): 9 ()
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