Working Paper: NBER ID: w3631
Authors: Wayne E. Ferson; George M. Constantinides
Abstract: Habit persistence in consumption preferences and durability of consumption goods are two hypotheses which imply time-nonseparability in the derived utility for consumption expenditures. We study a simple model with both effects, in which lagged consumption expenditures enter the Euler equation. Habit persistence implies that the coefficients on the lagged expenditures are negative, while durability implies positive coefficients. If both effects are present, then estimating the sign of the coefficients addresses the question as to which of the two effects is dominant. Earlier empirical work on monthly data supported the durability of consumption expenditures. We estimate and test the Euler equation using monthly, quarterly and annual data and find evidence that habit persistence dominates the effect of durability.
Keywords: Consumption; Habit Persistence; Durability
JEL Codes: D12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Habit persistence in consumption preferences (D11) | Negative coefficients on lagged consumption expenditures (E20) |
| Durability of consumption goods (E21) | Positive coefficients on lagged consumption expenditures (E20) |
| Habit persistence dominates durability in consumption preferences (D15) | Negative coefficients on lagged consumption expenditures (E20) |
| Habit persistence has a longer half-life than durability (D15) | Detectability at longer time intervals (C41) |