Habit persistence and durability in aggregate consumption

Abstract

Habit persistence in preferences and durability of consumption goods both imply time-nonseparability in the derived utility for consumption expenditures. We study a simple model with both effects. Lagged consumption expenditures enter the Euler equation, where habit persistence implies that their coefficients are negative and durability implies positive coefficients. Estimating the sign of the coefficients addresses the question of which effect is dominant. Earlier empirical work on monthly data supports the durability of consumption expenditures. We find evidence in monthly, quarterly, and annual data that habit persistence dominates the effect of durability.