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On Consumption Bunching under Campbell-Cochrane Habit Formation


  • Ljungqvist, Lars

    () (Dept. of Economics, Stockholm School of Economics)

  • Uhlig, Harald

    () (CentER for Economic Research)


Campbell and Cochrane (1999) propose a preference specification that can explain a wide variety of asset pricing puzzles such as the high equity premium. They augment the basic power utility function with a time-varying subsistence level, or "habit", which is in the spirit of "catching up with the Joneses" but with a novel nonlinear mapping of consumption into habit. This paper demonstrates a surprising implication of the Campbell-Cochrane preference specification: consumption bunching is desirable.

Suggested Citation

  • Ljungqvist, Lars & Uhlig, Harald, 1999. "On Consumption Bunching under Campbell-Cochrane Habit Formation," SSE/EFI Working Paper Series in Economics and Finance 337, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0337

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    References listed on IDEAS

    1. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    2. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    3. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
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    Cited by:

    1. Mary C. Daly & Daniel J. Wilson, 2006. "Keeping up with the Joneses and staying ahead of the Smiths: evidence from suicide data," Working Paper Series 2006-12, Federal Reserve Bank of San Francisco.
    2. Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005. "External Habit and the Cyclicality of Expected Stock Returns," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1023-1048, May.

    More about this item


    Catching-up-with-the-Joneses preferences; habit; consumption bunching;

    JEL classification:

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

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