Habits, Rationality and Myopia in the Life Cycle Consumption Function

Annals of Economics and Statistics, 1988, issue 9, 47-70

Abstract: This paper considers the effect both on solved out forward looking consumption functions and on Euler equations of two alternative hypotheses about habits: rational habits assume that consumers are aware of the effect of their current consumption decisions on their future marginal rates of substitution; under myopic habits, they are not aware. Demand systems evidence suggests there are important habits effects for most consumption goods, but time series models of aggregate consumption have found only a low degree of habit persistence, a result confirmed here by an analysis of quarterly U.S. data based on Euler equations. Taken together the evidence appears to favour the hypothesis of myopic habits.

Date: 1988
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Working Paper: Habits, Rationality and Myopia in the Life-Cycle Consumption Function (1986)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:1988:i:9:p:47-70

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