Habits, Rationality and Myopia in the Life Cycle Consumption Function.

Journal article

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 favor the hypothesis of myopic habits.

Authors: Muellbauer, J

• Journal: Annales d'Economie et de Statistique
• Volume: 0
• Publication date: 1988-01-01
• ISSN: 0769-489X
• Language: English