Consumption and habits: Evidence from panel data

The purpose of this paper is to test for the presence of habit formation in consumption decisions using household panel data. We apply the test proposed by Meghir and Weber (1996) to a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity across households (‘fixed effects’) and, therefore, to investigate whether the relationship between current and past consumption reflects habits or heterogeneity. Our results confirm the importance of accounting for fixed effects when ana lysing intertemporal consumption decisions allowing for time non separabilities. The purpose of this paper is to test for the presence of habit formation in con-sumption decisions using household panel data. We use the test proposed by Meghir and Weber (1996) and estimate the within-period marginal rate of sub-stitution (MRS) between commodities, which is robust to the presence of liquidity constraints. We use a Spanish panel data set in which households are observed for up to eight consecutive quarters. This temporal dimension is crucial, because it allows us to take into account time invariant unobserved heterogeneity acros