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The Habit Habit

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  • John H. Cochrane

Abstract

I survey the macro-finance literature related to "By Force of Habit." I show how many models reflect the same rough ideas, each with strengths and weaknesses. I outline how such models may illuminate macroeconomics, by putting time-varying risk aversion, risk-bearing capacity, and precautionary savings at the center of recessions, rather than constraints on flows as in old Keynesian models, or intertemporal substitution and riskfree rate variation as in new Keynesian models. Throughout I emphasize unsolved questions and profitable avenues for research.

Suggested Citation

  • John H. Cochrane, 2016. "The Habit Habit," Economics Working Papers 16105, Hoover Institution, Stanford University.
  • Handle: RePEc:hoo:wpaper:16105
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    References listed on IDEAS

    as
    1. Grishchenko, Olesya V. & Song, Zhaogang & Zhou, Hao, 2015. "Term Structure of Interest Rates with Short-run and Long-run Risks," Finance and Economics Discussion Series 2015-95, Board of Governors of the Federal Reserve System (US).
    2. Bansal, Ravi & Kiku, Dana & Yaron, Amir, 2012. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," Critical Finance Review, now publishers, vol. 1(1), pages 183-221, January.
    3. Bianca De Paoli & Pawel Zabczyk, 2013. "Cyclical Risk Aversion, Precautionary Saving, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 1-36, February.
    4. Urban Jermann, 2013. "A Production-Based Model for the Term Structure," NBER Working Papers 18774, National Bureau of Economic Research, Inc.
    5. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
    6. Adrien Verdelhan, 2010. "A Habit-Based Explanation of the Exchange Rate Risk Premium," Journal of Finance, American Finance Association, vol. 65(1), pages 123-146, February.
    7. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
    8. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
    9. Nicolae Gârleanu & Stavros Panageas, 2015. "Young, Old, Conservative, and Bold: The Implications of Heterogeneity and Finite Lives for Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 123(3), pages 670-685.
    10. Jermann, Urban J., 2013. "A production-based model for the term structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 293-306.
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