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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.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 337.

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Length: 12 pages
Date of creation: 22 Oct 1999
Date of revision:
Handle: RePEc:hhs:hastef:0337
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  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," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  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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