NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Habit Persistence and Durability in Aggregate Consumption: Empirical Tests

Wayne E. Ferson, George M. Constantinides

NBER Working Paper No. 3631 (Also Reprint No. r1707)
Issued in February 1991
NBER Program(s):   ME

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.

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Document Object Identifier (DOI): 10.3386/w3631

Published: Journal of Financial Economics, Vol. 29, No. 2, pp. 199-240, (October 1991) citation courtesy of

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