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Consumption, habit persistence, imperfect information and the lifetime budget constraint

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  • Willman, Alpo

Abstract

Based on the households' utility maximisation, a closed form approximation of the consumption function is derived and the deep parameters of the consumption function are estimated using aggregate euro area data. The novel element in our approach is the parameterisation of the information content regarding future income changes. In addition to the information regarding time series properties of the historical development of labour income, consumers have also period-specific information on future income realisations. Estimation results support the hypothesis that, although front-loaded, consumers have a lot of information on future income changes, but that also lagged consumption, through habit formation, plays an important role. JEL Classification: D12, E21

Suggested Citation

  • Willman, Alpo, 2003. "Consumption, habit persistence, imperfect information and the lifetime budget constraint," Working Paper Series 251, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2003251
    Note: 335687
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp251.pdf
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    References listed on IDEAS

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    Cited by:

    1. Schubert, Stefan F., 2014. "Dynamic Effects Of Oil Price Shocks And Their Impact On The Current Account," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 316-337, March.
    2. repec:zbw:rwirep:0029 is not listed on IDEAS
    3. Willman, Alpo, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series 765, European Central Bank.
    4. Kuismanen, Mika & Pistaferri, Luigi, 2006. "Information, habits, and consumption behavior: evidence from micro data," Working Paper Series 572, European Central Bank.
    5. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    6. Torsten Schmidt & Tobias Zimmermann, 2007. "Why are the Effects of Recent Oil Price Shocks so Small?," Ruhr Economic Papers 0029, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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    More about this item

    Keywords

    consumption; life-cycle hypothesis; wealth;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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