Habit Persistence and Durability in Aggregate Consumption: Empirical Tests

68 Pages Posted: 21 May 2004

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Date Written: February 1991

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.

Suggested Citation

Constantinides, George M. and Ferson, Wayne E., Habit Persistence and Durability in Aggregate Consumption: Empirical Tests (February 1991). NBER Working Paper No. w3631. Available at SSRN: https://ssrn.com/abstract=227439

George M. Constantinides

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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773-702-7258 (Phone)
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National Bureau of Economic Research (NBER)

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Wayne E. Ferson (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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