Consumption and Habits: Evidence from Panel Data

López-Salido, J David, Raquel Carrasco () and Jose Labeaga
Authors registered in the RePEc Author Service: J. David Lopez-Salido

No 3520, CEPR Discussion Papers from Centre for Economic Policy Research

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 (search for similar items in EconPapers)
JEL-codes: C33 D12 (search for similar items in EconPapers)
Date: 2002-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Consumption and Habits: Evidence from Panel Data (2005)
Working Paper: Consumption and habits: evidence from panel data (2002)
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