IDEAS home Printed from
   My bibliography  Save this paper

Habits, Rationality and Myopia in the Life-Cycle Consumption Function


  • Muellbauer, John


This paper investigates the role of habits in the consumption function. Two types of habits are considered: rational and myopic, these being distinctions which have long been made in the literature on systems of demand equations. In both cases past consumption affects current preferences, thus breaking the intertemporal separability of preferences often assumed by economists. If habits are rational, consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution. If habits are myopic, consumers lack this awareness and this may result in a time inconsistency in their behaviour. We explore the consequences of these two types of habituation, both for traditional "solved-out" consumption functions and for consumption functions in the "Euler equation" form popularized by Hall (1978). The two types of habitual behaviour yield representations of the aggregate consumption function which are in principle observationally distinct. We estimate the Euler-equation form of the consumption function for quarterly United States data over the period 1954-1981. We also consider time aggregation and other specification issues, such as those posed by liquidity constraints.

Suggested Citation

  • Muellbauer, John, 1986. "Habits, Rationality and Myopia in the Life-Cycle Consumption Function," CEPR Discussion Papers 112, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:112

    Download full text from publisher

    File URL:
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:


    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:cpr:ceprdp:112. 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: (). 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.

    We have no references for this item. You can help adding them by using 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.