Habit Persistence, Non-Separability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?

20 Pages Posted: 29 Nov 2007

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: October 1, 2007

Abstract

Consumption growth is predictable, a basic violation of the permanent-income hypothesis. This paper examines three possible explanations: rule-of-thumb behavior, in which households allow consumption to track per-period income flows rather than permanent income; habit persistence; and non-separability in preferences over consumption and leisure. The data appear most consistent with non-separable preferences over consumption and leisure.

Keywords: Habit persistence, inattention, excess sensitivity, excess smoothness

JEL Classification: E21, D91

Suggested Citation

Kiley, Michael T., Habit Persistence, Non-Separability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth? (October 1, 2007). FEDS Working Paper No. 2007-48. Available at SSRN: https://ssrn.com/abstract=1034271 or http://dx.doi.org/10.2139/ssrn.1034271

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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