IDEAS home Printed from
   My bibliography  Save this paper

Consumption with Habit Formation


  • Aylin Seckin


In a representative-agent model of intertemporal consumption-saving with stochastic income and habit formation, we have shown that precautionary savings observed in the data cannot be attributed only to income uncertainty, but also to the time-non-separability of preferences. We have found that, with habit-forming preferences, consumption depends not only on permanent income but also on past consumption and the stronger the habits the lower the effect of income uncertainty on consumption. For a given constant coefficient of risk aversion, habit-forming consumer will have smaller precautionary savings per unit of income risk faced than the one with time-separable preferences. By allowing habit forming preferences in consumption, a closed form solution, explaining excess-sensitivity, excess-smoothness and excess-growth puzzles of consumption, and thus, providing a better framework for empirically testing the behavior of consumption over the business cycle, is found with only i.i.d. income innovations. Dans un modèle intertemporel de consommation et d'épargne avec revenu stochastique et formation d'habitudes, nous avons démontré que l'épargne précautionnelle observée dans les données peut être attribuée non seulement à l'incertitude de revenu0501s aussi à l'inséparabilité des préférences. Nous avons trouvé que, avec les préférences qui forment des habitudes, la consommation dépend non seulement du revenu permanent0501s aussi de niveaux de consommations passés. De plus, plus les habitudes sont résistantes, moins grand sera l'effet de l'incertitude de revenu sur la consommation. Pour un coéfficient constant fixé de l'aversion au risque, le consommateur avec habitudes va avoir une épargne précautionnelle plus basse par unité de risque de revenu par rapport à celle avec des préférences temps-séparables. En introduisant la formation d'habitudes dans la consommation, et en supposant seulement des innovations i.i.d., nous avons trouvé une solution fermée qui explique les trois énigmes de consommation, l'excès de sensitivité, l'excès de lisseté et l'excès de croissance anticipée, et qui propose un meilleur modèle pour tester le trajet de la consommation pendant le cycle économique.

Suggested Citation

  • Aylin Seckin, 2000. "Consumption with Habit Formation," CIRANO Working Papers 2000s-39, CIRANO.
  • Handle: RePEc:cir:cirwor:2000s-39

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Benoit A. Aubert & Michel Patry & Suzanne Rivard & Heather Smith, 2000. "IT Outsourcing Risk Management at British Petroleum," CIRANO Working Papers 2000s-31, CIRANO.
    2. Marcel Boyer, 1999. "Les Expos, l'OSM, les universités, les hôpitaux : Le coût d'un déficit de 400 000 emplois au Québec = Expos, Montreal Symphony Orchestra, Universities, Hospitals: The Cost of a 400,000-Job Shortfall i," CIRANO Papers 99c-01, CIRANO.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Rob Alessie & Federica Teppa, 2010. "Saving and habit formation: evidence from Dutch panel data," Empirical Economics, Springer, vol. 38(2), pages 385-407, April.
    2. repec:eee:jetheo:v:172:y:2017:i:c:p:55-87 is not listed on IDEAS
    3. Luo, Yulei & Nie, Jun & Wang, Gaowang & Young, Eric R., 2017. "Rational inattention and the dynamics of consumption and wealth in general equilibrium," Journal of Economic Theory, Elsevier, vol. 172(C), pages 55-87.
    4. de la Croix, David, 2000. "Standard-of-Living Aspirations and Economic Cycles," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2000008, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    5. Arjen Siegmann, 2003. "Shortfall allowed: loss aversion and habit formation," WO Research Memoranda (discontinued) 741, Netherlands Central Bank, Research Department.

    More about this item


    Intertemporal consumption-saving; habit formation; dynamic programming; Consommation/épargne intertemporelles; formation d'habitudes; programmation dynamique;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:2000s-39. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.