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Households' Consumption under the Habit Formation Hypothesis. Evidence from Italian Households using the Survey of Household Income and Wealth (SHIW)

  • Mariacristina Rossi


This paper explores the mis-specification of preferences as a cause of the poor empirical performance of the traditional Life Cycle/Permanent Income model in explaining Italian households' consumption decisions. Consumption profiles generated under strict life cycle models could be hardly reconciled with those exhibited by Italian households. We estimate how household consumption evolves over time by using an Euler equation approach, enriched both for the presence of habit formation in households' preferences and uncertainty. We test its performance by using a GMM estimation strategy. Our results prove that ignoring habit persistence can lead to misleading results in interpreting the determinants of consumption.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 595.

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Date of creation: 04 May 2005
Date of revision:
Handle: RePEc:esx:essedp:595
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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  3. Jappelli, Tullio & Pistaferri, Luigi, 2005. "Intertemporal choice and consumption mobility," CFS Working Paper Series 2005/28, Center for Financial Studies (CFS).
  4. Carrasco, Raquel & Labeaga Azcona, J Maria & López-Salido, J David, 2002. "Consumption and Habits: Evidence from Panel Data," CEPR Discussion Papers 3520, C.E.P.R. Discussion Papers.
  5. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  6. Guiso, L. & Jappelli, T. & Terlizzese, D., 1992. "Why is Italy Saving Rate so High?," Papers 167, Banca Italia - Servizio di Studi.
  7. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  8. Christopher D. Carroll & Andrew A. Samwick, 1998. "How Important Is Precautionary Saving?," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 410-419, August.
  9. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers 699, C.E.P.R. Discussion Papers.
  10. Tullio Jappelli & Luigi Pistaferri, 1999. "The Dynamics of Household Wealth Accumulation in Italy," CSEF Working Papers 27, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Dec 2000.
  11. Alessandra Guariglia, 2002. "Consumption, habit formation, and precautionary saving: evidence from the British Household Panel Survey," Oxford Economic Papers, Oxford University Press, vol. 54(1), pages 1-19, January.
  12. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  13. Attanasio, Orazio P & Weber, Guglielmo, 1989. "Intertemporal Substitution, Risk Aversion and the Euler Equation for Consumption," Economic Journal, Royal Economic Society, vol. 99(395), pages 59-73, Supplemen.
  14. Alessandra Guariglia & Mariachristina Rossi, 1999. "Consumption, habit formation and precautionary saving: Evidence from the UK," Economics Discussion Papers 502, University of Essex, Department of Economics.
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