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Optimal decisions on the instantaneous rate of growth of consumption in excess of habit and money demand

Author

Listed:
  • Venegas-Martínez, Francisco

    (Escuela Superior de Economía, Instituto Politécnico Nacional)

  • Mendoza-Rivera, Ricardo J.

    (Escuela Superior de Economía, Instituto Politécnico Nacional)

  • García-Pérez, Luis E.

    (Escuela Superior de Economía, Instituto Politécnico Nacional)

Abstract

Objective: this paper develops a time-continuous deterministic model of a rational consumer that maximizes his utility of the instantaneous rate of growth of consumption in excess of habit and real money balances. Methodology: we introduce the concept of utility of the instantaneous rate of growth of consumption in excess of habit. The necessary conditions for an interior solution lead to a Bernoulli’s differential equation of second order. Results: closed form solutions of the instantaneous rate of growth of consumption in excess of habit, consumption, and real money balances are provided. Moreover, economic welfare of the consumer is computed and comparative statics exercises are carried out. Novelty: this the first time that in the utility function is included the growth rate of consumption in excess of habit, which provides richer environments for studying rational behavior of habit formation. Conclusions: under the assumption of logarithmic utility, it is found that consumption increases linearly with time due to the habit, while money demand remains constant to finance the habit through time.

Suggested Citation

  • Venegas-Martínez, Francisco & Mendoza-Rivera, Ricardo J. & García-Pérez, Luis E., 2021. "Optimal decisions on the instantaneous rate of growth of consumption in excess of habit and money demand," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 17(34), pages 39-47, Segundo s.
    • Handle: RePEc:ipn:panora:v:17:y:2021:i:34:p:39-47
    as

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    References listed on IDEAS

    as
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    3. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
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    5. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-1329, December.
    6. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-763, Part I Ju.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    consumer behavior; habit persistence; real money balances.;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • P46 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Consumer Economics; Health; Education and Training; Welfare, Income, Wealth, and Poverty

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