The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate whether the relationship between current and past consumption reflects habits or heterogeneity. Our results confirm the importance of accounting for fixed effects when analysing intertemporal consumption decisions allowing for time non-separabilities.

SSRN working paper, 2021

We examine empirically the path of consumption growth over time by looking at detailed microdata for the Spanish economy. We estimate different versions of a Euler equation linking consumption growth to the real interest rate and other socioeconomic and demographic variables. We work with two thorough datasets of microdata which compile rich economic, social and demographic information for households over two periods, 1977-1983 and 1985-1996. We find that consumption growth displays a positive and significant correlation with the interest rate, implying an intertemporal elasticity of substitution in the range 0.30-0.576, consistent with the literature. Our estimations also show that consumption growth is negatively correlated with retirement, thus suggesting a discontinuity in consumption which implies a departure from the standard life cycle model. Policy reforms which increase the level of real pensions have a positive impact on consumption. Results are robust to alternative specifications and control variables, and suggest the presence of precautionary saving over 1977-83.

Empirical Economics, 2009

This paper focuses on the role of habit formation in individual preferences. In this study, the model of Alessie and Lusardi (Econ Lett 55:103-108, 1997) and its extension by Guariglia and Rossi (Oxf Econ Pap 54:1-19, 2002) are considered. Our empirical specifications are based on their closed-form solutions, where current saving is expressed as a function of lagged saving and other regressors. In our study, we use a longitudinal data set from the Netherlands that allows us to disentangle the role of habit formation from unobserved heterogeneity. Contrary to most other studies using survey data, we find evidence in favor of habit formation. However, the magnitude of the habit formation coefficient is rather small. Income uncertainty seems to affect saving behavior of Dutch households.

2004

We examined the evidence of precautionary saving and Constantinides (1990) type habit formation model by using the Korean Household Panel Studies, which has six years of time series observations and thousands of cross section observations. Employing the dynamic panel data estimation method, we found that the estimates of parameters corresponding to the degree of habit formation and precautionary saving are

Journal of Economics, 2012

This paper investigates whether the external consumption habit can be a source of indeterminacy in a one-sector growth model when the labor supply is elastic. When there is a proper habit effect with a positive intertemporal elasticity of substitution, we find that the model exhibits indeterminacy if the coefficient of the habit formation is sufficiently large that allows for a substantial impact of current consumption on the habit. Indeterminacy arises even though the elasticity of the Frisch labor supply is positive and the elasticity of the labor demand in negative. In a calibrated version, we find that indeterminacy is empirically plausible when the habit effect is negative that features the "catching up with the Joneses" effect. Under given "catching up with the Joneses" effects, the external consumption habit can be a source of indeterminacy even if more than a half of the external consumption habit comes from past average consumption.

The Scandinavian Journal of Economics

All micro studies of demand are based on using time series cross sectional data. Because in such data each household is only observed once, it is only under strong identifying restrictions that one can interpret the coefficients on consumer behavior. For example, if tastes are correlated with income, the usual estimates of income elasticities from cross sectional data are biased. In contrast, panel data allows identification of the coefficients on consumer behavior in the presence of unobservable correlated heterogeneity. In this paper we make use of a unique Spanish panel data set on household expenditures to test whether unobservable heterogeneity in household demands (taste) is correlated with total expenditures (income). We find that tastes are indeed correlated with income for half of the goods considered.

2013

Consumption is the principal feature of Iran’s Gross National Production. Therefore, recognizing of factors that influence it is quite crucial. This article, investigates habit formation, durability, relative risk aversion and intertemporal substitution in consumption expenditures of Iranian households. For empirical study, at first, we constructed two weighted portfolio of the main assets return that households hold them. Then, by using generalized method of moments, we examined some models with the mentioned factors in pattern of households’ consumption for 1979-2012 periods. Our Empirical findings indicated that for durable goods, the effect of habit persistence dominated the effect of durability in consumption expenditures and for semi durable goods vice versa. Also, for semi-durable and durable goods the effect of durability dominated the effect of habit formation. Furthermore, the results indicate that coefficients of relative risk aversion and elasticity of intertemporal ...

The pattern of public consumption is determined by the level of income and its social environment. Consumption patterns are also associated with the number of family members, the fewer members of the family, the fewer the needs that must be met. However, in some households, there is a small income but the pattern of consumption is greater than the income, some also have few family members but has a large consumption pattern. This is in contrast to the existing theory. This research studies the relation between the role of education to consumption patterns and household member with the impact to make a saving.

Economics Letters, 1997

In this paper, we consider models of habit formation and derive closed-form solutions for consumption and saving under certainty equivalence and uncertainty. We find that consumption depends not only on permanent income and income risk, but also on past consumption. Similarly, saving depends not only on future income changes and income risk, but also on past saving.

2013

Incorporating dynamics such as habit formation in analysis of demand can make estimation more reliable and help to explain the "stickiness" in consumer demand behavior when consumers receive new information about products, such as a food safety event or recall. Scanner data allow many repeated observations of the same household so are ideal for analyzing the impact of habit on demand. In addition to that, scanner data allow us to easily observe the presence of zero purchases. The presence of zero purchases is an important econometric issue in empirical modeling on food demand in the sense that ignoring the censoring issue could lead to biased estimation results. This paper investigates the impact of state dependence on food demand using Nielsen 2009 and 2010 HomeScan data. In this paper, we take into account the censored nature of food expenditure data and employ a Bayesian procedure to estimate the dynamic demand models on dairy products. By controlling the individual het...

Empirica, 2006

We investigate the long run relationship between private consumption and disposable income for a sample of EU countries using recently developed panel cointegration techniques. For the ordinary consumption-income model the evidence on cointegration is ambiguous. In addition, the cointegration vector obtained by efficient estimation methods is not consistent with theoretical reasoning, as it reflects a decline in the savings rate

Economic Journal, 2005

The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate whether the relationship between current and past consumption reflects habits or heterogeneity. Our results confirm the importance of accounting for fixed effects when ana lysing intertemporal consumption decisions allowing for time non separabilities.

In this paper we analyze the importance of intertemporal non-separabilities for consumption decisions using household data. We follow the test suggested by , so we exploit the variability of the within-period marginal rate of substitution (MRS) between commodities. We also check for the presence of liquidity constraints by comparing the results obtained from the MRS to those of the Euler equations. For that purpose, we use a Spanish data set in which households are observed up to eight consecutive quarters. This length of the temporal dimension is crucial, since it allows both to account for the dynamics of consumption in the preferences as well as to control for time invariant unobserved heterogeneity across households. Our results con…rm the importance of accounting for …xed e¤ects when analyzing intertemporal consumption decisions allowing for time non-separabilities. Once we control for …xed e¤ects and use the adequate set of instruments we do not …nd evidence of misspeci…cation and the results yield supporting evidence of habit formation.

American Economic Review, 2000

This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data. (JEL D12, D91, E21)

2005

This paper explores the mis-specification of preferences as a cause of the poor empirical performance of the traditional Life Cycle/Permanent Income model in explaining Italian households’ consumption decisions. Consumption profiles generated under strict life cycle models could be hardly reconciled with those exhibited by Italian households. We estimate how household consumption evolves over time by using an Euler equation approach, enriched both for the presence of habit formation in households’ preferences and uncertainty. We test its performance by using a GMM estimation strategy. Our results prove that ignoring habit persistence can lead to misleading results in interpreting the determinants of consumption.

Journal of Applied Economic Sciences, 2009

The paper deals with the detection and measurement of the level of persistence on aggregate private consumption in Portugal, USA, European Union and EuroZone as well as on some categories of aggregate consumption in Portugal. By the use of a non-parametric methodology applied to monthly data (1992-2007) it is concluded that aggregate consumption in Europe (both European Union and Euro Zone) is more persistent than in the USA and in Portugal. In particular, the relatively lower degree of persistence shown by the consumption in Portugal can be beneficial for the effectiveness of the countercyclical fiscal and monetary policies that are currently being implemented to overcome the current economic crisis. Our results also suggest that consumption of durables is less persistent, also being more volatile. This result is important in the explanation of the severity of the current economic crisis in Portugal.

Journal of Economic Behavior & Organization, 2009

Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents' preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation.

2012

Consumption being the major and stable component of GDP has been the focus of attention by many economists. The present case study is an attempt to develop a Behavioral Consumption Function of household for area of Wah Cantt by using primary data (sample questionnaire). The objective of the study is to empirically test not only the validity of REPIH theory presented by Hall (1978) for overall data set but also for each income level .The study finds that single particular consumption group verifies the Rational Expectations Permanent Income Hypothesis.

This paper presents the consumption function of Marmotte, the multi-country model of the CEPII-CEPREMAP, and its estimation for the 17 countries of the model. The consumption function is based on the permanent income model. We have extended this model to account for the presence of habit formation and liquidity constraints in the consumption behaviors. The results obtained give us reasonable values for the consumption function of Marmotte. Differences across the 17 countries concern only the habit behaviors. However, these differences are not large enough to imply significant differences in terms of consumption responses to shocks in the simulations of the model.

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