NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence

Marjorie Flavin, Shinobu Nakagawa

NBER Working Paper No. 10458
Issued in May 2004
NBER Program(s):   EFG

The paper generalizes the Grossman and Laroque (1990) model of optimal consumption and portfolio allocation in the context in which a durable good (or house) subject to adjustment costs is both an argument of the utility function and a component of wealth. Because the Grossman and Laroque model abstracts completely from nondurable consumption, their analysis cannot address either a) the potential spillover effects of the adjustment costs of the durable good on the dynamics of nondurable consumption, or b) the implications for portfolio allocation of housing risk arising from variation in the relative price of housing. By introducing an endogenously determined but infrequently adjusted state variable, the housing model generates many of the implications of the habit persistence model, such as smooth nondurable consumption, state-dependent risk aversion, and a small elasticity of intertemporal substitution despite moderate risk aversion. Using a specification of the utility function which nests both the housing model and habit persistence, the Euler equation for nondurable consumption is estimated with household level data on food consumption and housing from the PSID. The habit persistence model (without housing effects) can be decisively rejected, while the housing model (without habit effects) is not rejected.

download in pdf format
   (1034 K)

email paper

This paper is available as PDF (1034 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10458

Published: Flavin, Marjorie and Shinobu Nakagawa. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence." American Economic Review 98, 1 (March 2008): 474-95.

Users who downloaded this paper also downloaded these:
Grossman and laroque w2369 Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods
Ferson and Constantinides w3631 Habit Persistence and Durability in Aggregate Consumption: Empirical Tests
Campbell and Mankiw Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence
Viceira w7409 Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income
Bernanke w1038 Adjustment Costs, Durables, and Aggregate Consumption
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us