Finance and Economics Discussion Series
Habit Persistence, Non-separability Between Consumption and Leisure, or Rule-of-Thumb Consumers: Which Accounts for the Predictability of Consumption Growth?
Michael T. Kiley
2007-48
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: Habit persistence, inattention, excess sensitivity, excess smoothness
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