Habit Persistence, Nonseparability between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?

Michael Kiley

The Review of Economics and Statistics, 2010, vol. 92, issue 3, 679-683

Abstract: Consumption growth is predictable, a basic violation of the permanent-income hypothesis. This paper examines three possible explanations: rule-of-thumb behavior, in which households allow consumption to track per period income flows rather than permanent income; habit persistence; and nonseparability in preferences over consumption and leisure. The results illustrate that weak instruments make the results highly sensitive to some arbitrary choices common in the literature. Using a technique that is robust to instrument choice, the analysis shows support for habit persistence and rule-of-thumb behavior and little support for nonseparability between consumption and leisure.

Date: 2010
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Working Paper: Habit persistence, non-separability between consumption and leisure, or rule-of thumb consumers: which accounts for the predictability of consumption growth? (2007)
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