Consumption and Habits: Evidence from Panel Data

Raquel Carrasco (), Jose Labeaga and David Lopez-Salido

Economic Journal, 2005, vol. 115, issue 500, 144-165

Abstract: The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by Meghir and Weber (1996) to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households ('fixed effects') and, therefore, to investigate whether 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. Copyright 2005 Royal Economic Society.

Date: 2005
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Working Paper: Consumption and Habits: Evidence from Panel Data (2002)
Working Paper: Consumption and habits: evidence from panel data (2002)
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