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Habit Formation and the Gains from Price Stability

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  • David Atkin

Abstract

A counter-intuitive result from consumer theory is that consumers facing stable prices will benefit from a mean-preserving spread of those prices. This article explores a new explanation for why the common intuition that price volatility is undesirable may be correct: the presence of habit formation in consumption. If prices are fluctuating, and preferences depend on past consumption, in every period the most favored goods can also be the most expensive ones, with negative consequences for both welfare and nutrition. (JEL codes: E2, O1, D9, I15) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • David Atkin, 2012. "Habit Formation and the Gains from Price Stability," CESifo Economic Studies, CESifo, vol. 58(2), pages 373-384, June.
  • Handle: RePEc:oup:cesifo:v:58:y:2012:i:2:p:373-384
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifs019
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    Cited by:

    1. Matthias Kalkuhl & Mekbib Haile & Lukas Kornher & Marta Kozicka, 2015. "Cost-benefit framework for policy action to navigate food price spikes. FOODSECURE Working Paper No 33," FOODSECURE Working papers 33, LEI Wageningen UR.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • I15 - Health, Education, and Welfare - - Health - - - Health and Economic Development

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