Habit Formation in Consumption and Its Implications for Monetary-Policy Models
Top Cited Papers
Open Access
- 1 June 2000
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 90 (3) , 367-390
- https://doi.org/10.1257/aer.90.3.367
Abstract
This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification. (JEL D12, E52, E43)Keywords
This publication has 18 references indexed in Scilit:
- Habit Formation in Consumer Preferences: Evidence from Panel DataAmerican Economic Review, 2000
- How Taxing is Corruption on International Investors?The Review of Economics and Statistics, 2000
- By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market BehaviorJournal of Political Economy, 1999
- Towards a compact, empirically-verified rational expectations model for monetary policy analysisCarnegie-Rochester Conference Series on Public Policy, 1997
- Saving and growth: a reinterpretationCarnegie-Rochester Conference Series on Public Policy, 1994
- Habit Formation: A Resolution of the Equity Premium PuzzleJournal of Political Economy, 1990
- Cointegration and Tests of Present Value ModelsJournal of Political Economy, 1987
- Aggregate Dynamics and Staggered ContractsJournal of Political Economy, 1980
- Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and EvidenceJournal of Political Economy, 1978
- Econometric policy evaluation: A critiqueCarnegie-Rochester Conference Series on Public Policy, 1976