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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

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    1. Olesya V. Grishchenko & Zhaogang Song & Hao Zhou, 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 (U.S.).
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    Cited by:

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    2. Adriana Grasso & Filippo Natoli, 2018. "Consumption volatility risk and the inversion of the yield curve," Temi di discussione (Economic working papers) 1169, Bank of Italy, Economic Research and International Relations Area.
    3. Sanghyun Hong, 2020. "Transactions Costs and the Equity Premium Puzzle," Working Papers in Economics 20/16, University of Canterbury, Department of Economics and Finance.
    4. G. Gopalakrishna, 2017. "Robust test of Long Run Risk and Valuation risk model," Working Papers wp1107, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. John Y. Campbell & John H. Cochrane, 2015. "The Fragile Benefits of Endowment Destruction," Journal of Political Economy, University of Chicago Press, vol. 123(5), pages 1214-1226.
    6. Jair N. Ojeda-Joya, 2014. "A Consumption-Based Approach to Exchange Rate Predictability," Borradores de Economia 12339, Banco de la Republica.
    7. Lee, Sang Seok & Luk, Paul, 2018. "The Asian Financial Crisis and international reserve accumulation: A robust control approach," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 284-309.
    8. Held, Matthias & Kapraun, Julia & Omachel, Marcel & Thimme, Julian, 2020. "Up- and downside variance risk premia in global equity markets," Journal of Banking & Finance, Elsevier, vol. 118(C).

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