Habit Formation In Consumption Research Articles

Elicitation of electricity consumption habit formation among new subscribers

In this study, our aim is to explore the formation of electricity consumption habits in Cote d'Ivoire, specifically focusing on new subscribers. The growth of residential electricity consumption globally has been influenced by these habits, which can lead to inertia and inefficient energy usage. Using the unique database of the National Electricity Company, we uncover that electricity consumption habits exhibit a high level of persistence, and this persistence tends to strengthen over time. These findings highlight the need to develop policies that encourage electricity efficiency among new subscribers, to combat energy inefficiency and foster positive consumption habits at the household level.

Impacts of Habit Formation Effect on Food Consumption and Nutrient Intake in Rural China.

This study employs panel data and a dynamic Almost Ideal Demand System (AIDS) model to investigate the habit formation effect of food consumption among Chinese rural residents and its consequential impact on nutritional intake. The dataset, spanning from 2012 to 2018, encompasses nine provinces in China and involves 5390 rural households. The findings reveal that, excluding beef, mutton, and poultry, there are significant habit formation effect on the consumption of food categories, notably grains, vegetables, and edible oils. Lower-income and younger demographics demonstrate a more pronounced reliance on established dietary habits. Influenced by the habit formation effect, there is a substantial reduction in the income elasticity differences across various food types. Overlooking the habit formation effect in food consumption would lead to an underestimation of the income elasticity of energy, fat, and carbohydrates. This suggests that, over the long term, food consumption habit formation is a pivotal factor in enabling the enhancement of residents' dietary structures, amplifying the incremental energy intake associated with income increases, and accelerating the transition towards nutritional surplus. The conclusions drawn from this study offer valuable insights for ensuring food security and nutritional balance. Policy-makers of food and nutrition strategies should duly consider the habit formation effect on residents' food consumption, and seek to optimize dietary patterns and promote nutritional transformation by food consumption habit intervention.

Habit formation in context: Context-specific and context-free measures for tracking fruit consumption habit formation and behaviour.

Interventions promoting habitual fruit consumption have the potential to bring about long-term behaviour change. Assessing the effectiveness of such interventions requires adequate habit and behaviour measures. Habits are based on learned context-behaviour associations, so measures that incorporate context should be more sensitive to expected habit and behaviour changes than context-free measures. This study compared context-specific and context-free measures of fruit consumption habit and behaviour following a 3-week habit formation intervention. Prospective online study (n=58). Behaviour frequency was assessed across five timepoints, retrospectively (Time 1 [T1], T5) or via daily diary data (uploaded weekly at T2, T3 and T4). Habit strength was assessed before (T1) and immediately after the intervention (T4), and again 2 weeks later (T5). Analyses of variance were run, with time and context specificity as within-subject factors, and habit and behaviour frequency as dependent measures. An interaction between time and context specificity was found in both analyses (habit: F(2,114)=12.848, p < .001, part.η2 =.184; behaviour: F(2,114)=6.714, p=.002, part.η2 =.105). Expected habit formation patterns 5 weeks post-baseline were only detected by the context-specific habit measure. Likewise, increased behaviour frequency was only found when the target context was specified (p's < .001). Assessments of purposeful dietary habit and behaviour change attempts should incorporate context-specific measurement.

A Note on the Neo-Fisher Effect in the New Keynesian Model

AbstractTypically, contractionary monetary policy shocks increase the nominal and real rate of interest, which reduces both inflation and output . In contrast, the neo-Fisher effect (NFE) suggests that a transitory but persistent increase in the nominal rate of interest increases inflation in the short run. In a New Keynesian model augmented with several frictions, including the cost channel of monetary policy, real wage rigidity, habit formation in consumption, dampened expectations, and anticipated monetary policy shocks, we derive analytical conditions that give rise to (or avert) the NFE. We show that the NFE can arise due to the interplay between these frictions, and not only when the persistence of the policy shock is large, or when agents are forward-looking, as documented by the existing literature.

Linkages between Household Budget Allocations and Welfare Changes: Implications of Habit Formation and Price Effects

This study examines households’ habit formation in consumption and investigates how household budget allocations are related to welfare changes. The results of the dynamic almost ideal demand system show that there exist habit persistence in purchasing food, clothing, housing, and health items and depletion in other items. Regarding the price responsiveness, the results reveal that price changes result in household budget reallocations with varying income and substitution effects. Moreover, the compensating variations are used to measure welfare changes between 2003 and 2016. The results represent that the increased prices result in welfare losses despite households’ budget reallocations across all income quintiles.

The amplification of the New Keynesian models and robust optimal monetary policy

This paper analyzes whether and how model uncertainty affects the amplification mechanism of the New Keynesian models in a simple min-max framework where the central bank plays a zero-sum game versus a hypothetical, evil agent. A first finding on a benchmark model with staggered price setting is that a robust optimal commitment policy necessitates more aggressive policy under a demand shock. Further, bringing additional persistence into the model deteriorates the effectiveness of monetary policy. Hence, allowing for either habit formation or partial indexation of prices to lagged inflation rate requires a stronger response for the policy to a demand shock. Together with the specification doubts, in order to reassure the private sector and signal that it will stabilize the fluctuations in the output gap, the policymaker reacts more aggressively as persistence rises. Although inflation persistence does not change the impact of model uncertainty, habit formation in consumption eliminates even reverses the impact of uncertainty on the policy reaction to a supply shock. In all cases, policymaker attributes less importance to nominal interest rate inertia with concerns about model uncertainty.

Dynamic Tax Evasion with Habit Formation in Consumption*

AbstractWe model the optimal intertemporal decision of an agent who chooses tax evasion and consumption, over an infinite lifetime horizon, where consumption is driven by habits. We find the following: (i) tax evaders reduce consumption in the early stages of habit accumulation and increase it over time; (ii) habit formation has a dampening effect on tax evasion; (iii) neglecting tax evasion can lead to habit overestimation; (iv) the effect of the tax rate on tax evasion is ambiguous; (v) heavy fines are more efficient than frequent controls in reducing tax evasion.

Business cycles in Ethiopia under alternative monetary policy rules

PurposeThe purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules.Design/methodology/approachIn order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015.FindingsThe main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities.Research limitations/implicationsThe major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively.Originality/valueUsing DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

Changes in the Inflation Target and the Comovement between Inflation and the Nominal Interest Rate

Would raising the inflation target require an increase in the nominal interest rate in the short run? We answer this policy question, first analytically in a small-scale New Keynesian model with backward-looking components where a closed-form solution exists, and then in a medium-scale model of Smets and Wouters (2007) calibrated to the U.S. economy. Our analysis shows that the short-run comovement between inflation and the nominal interest rate conditional on changes in the inflation target is more likely to be positive, all else equal, as the monetary authority reacts less aggressively to the deviation of inflation from its target. Meanwhile, features of the model that enhance backward-looking behavior, such as backward price indexation and habit formation in consumption, are shown to reduce the likelihood of the positive comovement. However, our investigations reveal that in both models, this positive comovement or so-called Neo-Fisherism is prevalent across a wide-range of empirically-plausible parameter values. Using the Smets and Wouters model with a zero lower bound constraint (ZLB) on the nominal interest rate, we show that raising the inflation target could be an effective alternative policy framework to reduce the possibility of a binding ZLB constraint and to mitigate the potentially large output loss.

THE NEW KEYNESIAN WAGE PHILLIPS CURVE: CALVO VS. ROTEMBERG

We systematically evaluate how to translate a Calvo wage duration into an implied Rotemberg wage adjustment cost parameter in medium-scale New Keynesian DSGE models by making use of the well-known equivalence of the two setups at first order. We consider a wide range of felicity functions and show that the assumed household insurance scheme and the presence of labor taxation greatly matter for this mapping, giving rise to differences of up to one order of magnitude. Our results account for the inclusion of wage indexing, habit formation in consumption, and the presence of fixed costs in production. We also investigate the conditional and unconditional welfare implications of the wage-setting schemes under efficient and distorted steady states.

Habit formation in social media consumption: a case of political engagement

ABSTRACTThis study draw upon the theory of habit formation in consumption from macroeconomics to support the evidence on the existence of habit formation in social media consumption. Treating social media consumption as a form of digital good consumption and using aggregated weekly posts from the Facebook pages of a group of 12 politicians in the cabinet of Singapore, we verified through a non-separable recursive time model that social media consumption habits were developed among this group of politicians. This study further confirms the existence of reciprocity by validating habit formation in the social media consumption of citizens and followers of these politicians’ posts using time aggregated data of ‘likes’, ‘shares’ and ‘comments’. Further, this study shows the relationship between the strength of habit formation in social media consumption of politicians and citizens is positively correlated: the stronger the habit formation, the stronger the social capital reciprocity. Through these measurements, our analysis proved that political engagement in social media is a bi-directional habitual process and the use of a habit formation coefficient as a new parameter to measure ‘reciprocal engagement’ in social media provides a better understanding of the dynamic exchange between users of social media.

Changes in the Inflation Target and the Comovement Between Inflation and the Nominal Interest Rate

Would raising the inflation target require an increase in the nominal interest rate in the short run? We answer this policy question, first analytically in a small-scale New Keynesian model with backward-looking components where a closed-form solution exists, and then in a medium-scale model of Smets and Wouters (2007) calibrated to the U.S. economy. Our analysis shows that the short-run comovement between inflation and the nominal interest rate conditional on changes in the inflation target is more likely to be positive, all else equal, as the monetary authority reacts less aggressively to the deviation of inflation from its target. Meanwhile, features of the model that enhance backward-looking behavior, such as backward price indexation and habit formation in consumption, are shown to reduce the likelihood of the positive comovement. However, our investigations reveal that in both models, this positive comovement or so-called Neo-Fisherism is prevalent across a wide-range of empirically-plausible parameter values. Using the Smets and Wouters model with a zero lower bound constraint (ZLB) on the nominal interest rate, we show that raising the inflation target could be an effective alternative policy framework to reduce the possibility of a binding ZLB constraint and to mitigate the potentially large output loss.

Comment on “Why Has Japan Failed to Escape from Deflation?”

Understanding the price dynamics is always at the heart of studies on monetary policy. If prices are flexible, there is no need for monetary policy as a stabilization tool. If not, central banks should offer some nominal anchor so that welfare costs stemming from relative price dispersion should be reduced. Watanabe and Watanabe (2018) conduct careful analyses using micro data. Two main conclusions are: a simple menu cost model can explain the price developments in Japan well in that “there is a negative correlation between trend inflation and the share of items whose rate of price change is near zero,”1 and the “inflation norm” is too low in Japan. Watanabe and Watanabe provide comprehensive empirical facts to support these two conclusions. It also merits attention that the observed empirical regularities are replicated with simulations using a simple menu cost model. Structural interpretations of the empirical findings are offered albeit indirectly via model simulation. Not only do Watanabe and Watanabe offer convincing facts in understanding the Japanese economy from the view point of positive analysis, but also the findings in their paper have an immediate policy implication: It is not easy for Japan to attain an inflation target of 2%. Papers with important facts and significant policy implications are always good and highly appreciated. Watanabe and Watanabe's paper is one of these good papers. Thus, I do not have any particular comments to oppose their main conclusions. Let me comment on what we do not know from the data, and the policy implication. We do not know the markups in individual goods. In their menu cost model, nominal rigidities are favored as the way to explain price developments in Japan. This conclusion is mainly supported by the analyses in Sections 2.2 and 2.3 about the flattening of the reduced-form Phillips curve. However, we still cannot conclude that this less clearer relationship between inflation and unemployment rates is as a result of higher nominal rigidities possibly due to menu costs, since we cannot observe marginal costs. The relationship between inflation and unemployment rates can be just a reduced-form one. In the language of the New Keynesian model, unemployment or the output gap must be structurally related to markups. Otherwise, a causal argument is not possible. I am not fully sure whether such a relationship is stemming from menu costs or higher real rigidities around zero inflation rates. Real rigidities arise when marginal costs are sticky or marginal revenues are flexible. The former can be caused by habit formation in consumption, endogenous capacity utilization or investment growth adjustment costs as included in the canonical dynamic stochastic general equilibrium (DSGE) model a la Christiano et al. (2005), while the latter can emerge with a kinked demand curve as examined in the first-generation New Keynesian Model a la Kimball (1995). In order to identify the causes of the less clearer relationship between inflation and unemployment rates, it would be ideal if we can use the marginal cost data as examined in Eichenbaum et al. (2011). The inability to observe markups means that a careful interpretation of the analyses in Watanabe and Watanabe's section 4 is required. If the relationship between unemployment and markup is not stable nor structural, increasing real rigidities around zero inflation rates can explain the fact that “price stickiness as measured by the share of unchanged items increases as the inflation rate declines from a positive value to zero.” More stickiness around lower inflation rates should imply higher welfare costs stemming from relative price dispersions. On the other hand, menu costs are small near zero inflation rates. Besides the problems due to the zero lower bound on nominal interest rates, should the central bank really care about inflation developments near zero inflation rates? This point is related to the conclusion made by Nakamura et al. (2016) that “the main costs of inflation in the New Keynesian model are completely elusive in the data. This implies that the strong conclusions about optimality of low inflation rates reached by researchers using models of this kind need to be reassessed.”

To Eat or Not to Eat: Seafood Consumption Habit Formation

ABSTRACTHealthy development and nutritional sufficiency have long been linked to consumption of a well-balanced diet, especially in primary school age children. Seafood products have been identified as a key component of a healthy diet. The consumption habits of a balanced and sustainable diet in children needs to be examined while taking into account family and environmental factors which influence eating habit formation in young children. The family setting is the first place where children acquire examples and principles of their own eating habits. Therefore, this study explores the effects of family eating habits on seafood consumption habit formation in children. Seafood intake diaries, pictures of consumed meals, as well as in-depth interviews formed a pilot study which included four families. The collected results were thematically analyzed and underpinned by principles of the Theory of Planned Behavior, Stages of Change Model, and Social Cognitive Theory. The pilot study results revealed an array of attitudes and preferences, norms (e.g., religion and parental duty), perceived drivers (e.g., health benefits), and perceived barriers (e.g., affordability and availability) which influence the formation of sustainable eating habits in children. A range of strategies (internal and external) for assisting appropriate eating habit formation including consumption of sustainable seafood by children are discussed.

Habit formation in consumption: A meta-analysis

We examine 597 estimates of habit formation reported in 81 published studies. The mean reported strength of habit formation equals 0.4, but the estimates vary widely both within and across studies. We use Bayesian and frequentist model averaging to assign a pattern to this variance while taking into account model uncertainty. Studies employing macro data report consistently larger estimates than micro studies: 0.6 vs. 0.1 on average. The difference remains 0.5 when we control for 30 factors that reflect the context in which researchers obtain their estimates, such as data frequency, geographical coverage, variable definition, estimation approach, and publication characteristics. We also find that evidence for habits strengthens when researchers use lower data frequencies, employ log-linear approximation of the Euler equation, and utilize open-economy DSGE models. Moreover, estimates of habits differ systematically across countries.

Habit formation and exhaustible resource risk-pricing

This paper studies the risk-pricing implications of introducing habit formation in consumption in a model that encompasses growth with nonrenewable resources and capital markets. It is shown that the expected return on nonrenewable resource stocks incorporates both short-run and long-run risk factors. The short-run risk factor is associated with shocks to current surplus consumption growth. The long-run risk factor reflects the investor's desire to hedge against long-run shocks to future surplus consumption prospects (long-run habit risk premium). The model is tested using energy commodities index and US aggregate real per capita consumption data, and the results confirm that habit enters significantly in the pricing equation by entertaining a long-run time-varying risk coefficient. Compared to results obtained with a no-habit formation model (time-separable preferences), we found that long-run future prospects of surplus consumption constitute a forward-looking risk factor to be taken into account in explaining the dynamics of energy prices under uncertainty.

Why Can't a Woman Invest More Like a Man? Gender Differences in Investment Behaviour

This research finds distinct life cycle patterns of equity participation by gender. The significant factors associated with equity participation also vary notably by gender and age. Women exhibit greater variability in both participation levels and significant factors. Family circumstances are more relevant factors for women. Family obligations appear to constitute a type of habit formation, which affects participation in risky assets in a manner consistent with recent research on life cycle investment models incorporating background risk in labour income and habit formation in consumption. An improved understanding of the life cycle patterns and significant factors in investment behaviour can improve life cycle investment strategies.

Bayesian estimation of a dynamic stochastic general equilibrium model with asset prices

This paper presents a novel Bayesian method for estimating dynamic stochastic general equilibrium (DSGE) models subject to a constrained posterior distribution for the implied Sharpe ratio. We apply our methodology to a DSGE model with habit formation in consumption and leisure, and show that the constrained estimation produces both reasonable asset‐pricing and business‐cycle implications. Next, we estimate the Smets–Wouters model subject to the same Sharpe ratio constraint. The results move the model closer to reproducing observed risk premia, but at increasing cost to its macroeconomic performance. Bayesian estimation stochastic steady state prior choice Sharpe ratio C11 E32 E44 G12

Variety-Controlling Public Policy Under Addiction and Saturation

This paper constructs a tractable general equilibrium model for investigating the dissimilar effects of addiction and saturation on consumption and public policy. By introducing an industry-specific intertemporal consumption externality, we provide clear analytical results that a lump-sum subsidy for firms can increase welfare in the presence of a negative externality (saturation). A tax can accomplish the same given a positive externality (addiction). Unlike existing studies of cultural goods, these results are not based on assumptions concerning exogenous different preferences across groups, but rather on conventional monopolistic competition and consumption habit formation models in macroeconomics.

Utility maximization with addictive consumption habit formation in incomplete semimartingale markets

This paper studies the continuous time utility maximization problem on consumption with addictive habit formation in incomplete semimartingale markets. Introducing the set of auxiliary state processes and the modified dual space, we embed our original problem into a time-separable utility maximization problem with a shadow random endowment on the product space $\mathbb{L}_+^0(\Omega\times [0,T],\mathcal{O},\overline{\mathbb{P}})$. Existence and uniqueness of the optimal solution are established using convex duality approach, where the primal value function is defined on two variables, that is, the initial wealth and the initial standard of living. We also provide sufficient conditions on the stochastic discounting processes and on the utility function for the well-posedness of the original optimization problem. Under the same assumptions, classical proofs in the approach of convex duality analysis can be modified when the auxiliary dual process is not necessarily integrable.