UK Consumers’ Habits

Ryan Banerjee and Nicoletta Batini

No 13, Discussion Papers from Monetary Policy Committee Unit, Bank of England

Abstract: We follow Fuhrer (2000) in estimating via Maximum Likelihood a log-linear consumption function on UK data. In doing so we consider various habit formation assumptions. We show that a model of purely “external” habits as in Fuhrer (2000) fits the UK data remarkably well, and possibly in a superior way than US data where, according to our estimates, consumers’ habits look more “internal” in that they appear indexed to past average consumption of only a subset of (peer) consumers in the economy, rather than total past per capita consumption. We also find that for about one seventh of UK consumers, current consumption equals current income_a strong violation of the permanent income hypothesis. Embedded in a sticky price-sticky inflation open-economy monetary model, the model that we estimate helps mimic the hump-shaped response of the output gap to income and interest rate shocks observed in the UK. Estimates of output Euler equations for the UK using a similar method agree with our general results. The consumption and output models that we estimate forecast significantly better than unrestricted open-economy VARs.

Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.bankofengland.co.uk/publications/extern ... /extmpcpaper0013.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0013.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0013.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mpc:wpaper:13

Access Statistics for this paper

More papers in Discussion Papers from Monetary Policy Committee Unit, Bank of England Contact information at EDIRC.
Bibliographic data for series maintained by Bank of England Website ().