Working Paper

Habit persistence, non-separability between consumption and leisure, or rule-of thumb consumers: which accounts for the predictability of consumption growth?

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 non-separability in preferences over consumption and leisure. The data appear most consistent with non-separable preferences over consumption and leisure.

Keywords: Consumption (Economics); Consumer behavior;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2007

Number: 2007-48