A recent study reports that habit formation in consumption can improve the ability of the present value model of the current account (PVM) to forecast actual current account movements because habits make the current account more volatile. This paper, however, shows that the habit-forming PVM is observationally equivalent to the canonical PVM augmented with a transitory consumption shock: the sa...

This paper estimates two optimization-based sticky-price New Keynesian models and assesses how well they describe US output, inflation, and interest rate dynamics. We consider models in which either internal habit formation or external habit formation influence consumption behavior, and in which Calvopricing and inflation indexation generate price and inflation inertia. Subject to constraints d...

In this paper the idea that some households always spend the totality of their current income the rule of thumb behavior is applied to a small open economy framework. A model of current account with rule of thumb individuals and habit formation is constructed and estimated for five different countries. Two parameters of the model are of particular interest: the share of domestic income that acc...

Fundamental to any theory of capital taxation is a description of individual savings behavior. Successful descriptions of savings behavior have often resorted to the habit formation hypothesis. This paper studies the effect of habit formation on optimal capital taxes in a dynamic Mirrleesian model. We make three distinct contributions. First, we decompose intertemporal wedges (implicit capital ...

We investigate temporal decisions to participate in exercise in a dynamic model featuring present bias and habit formation. The model highlights naivete about present bias and projection bias about habit formation/decay and implies that promoting participation in physical activity must both encourage the inactive to start and discourage the active from quitting as behavioral biases apply to bot...

This paper extends the work on habit formation of Pollak [Habit formation and dynamic demand functions. J. Polit. Econ. (197O)J and provides a critical counterexample to a conjecture of von Weizslcker [Notes on endogenous changes of tastes, J. Econ. Theory (1971)J concerning the existence of a “longrun utility function.” A linear specification of habit formation is applied to a general system o...