Consumption and Habits: Evidence from Panel Data

37 Pages Posted: 13 Nov 2002

See all articles by Raquel Carrasco

Raquel Carrasco

Universidad Carlos III de Madrid - Department of Economics; Centre for Economic Policy Research (CEPR)

J. Maria Labeaga Azcona

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics

David Lopez-Salido

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 2002

Abstract

The purpose of this Paper is to test for the presence of habit formation in consumption decisions using household panel data. We use the test proposed by Meghir and Weber (1996) and estimate the within-period marginal rate of substitution between commodities, which is robust to the presence of liquidity constraints. To that end, we use a Spanish panel dataset in which households are observed up to eight consecutive quarters. This temporal dimension is crucial, since it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate if 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. Once fixed effects are controlled for and a proper set of instruments is used, the results yield supporting evidence of habit formation in the demand system of food at home, transport and services.

Keywords: Consumption, habits, panel data

JEL Classification: C33, D12

Suggested Citation

Carrasco Perea, Raquel and Labeaga Azcona, José Maria and Lopez-Salido, David, Consumption and Habits: Evidence from Panel Data (November 2002). CEPR Discussion Paper No. 3520. Available at SSRN: https://ssrn.com/abstract=350941

Raquel Carrasco Perea (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 624 9583 (Phone)
+34 91 624 9875 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

José Maria Labeaga Azcona

Universidad Nacional de Educacion a Distancia (UNED) - Faculty of Economics ( email )

Calle Senda del Rey, 11
28040 Madrid
Spain
+34 91 398 7811 (Phone)
+34 91 398 6339 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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