Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-26T18:57:42.140Z Has data issue: false hasContentIssue false
  • English
  • Français

Consumption Growth and the Real Interest Rate following a Monetary Policy Shock: Is the Habit Persistence Assumption Relevant?*

Published online by Cambridge University Press:  17 August 2016

Stéphane Auray  and
Clémentine Gallès
Get access

Abstract:

In this paper, we study the role of habit formation in accounting for the joint behavior of the real interest rate and consumption growth following a monetary policy shock. A VAR estimation on US data shows that following a contractionary monetary policy shock, the real interest rate exhibits a persistent increase while consumption growth drops persistently. As the standard permanent income model is known to be unable to replicate this co–movement for intertemporal substitution motives, we introduce habit persistence in consumption behavior. We test the implied Euler equation using a method of moments on conditional moments (IRF) obtained from the VAR model. Our estimates of the habit persistence parameter are similar to previous results in the literature. Further, we find empirical support in favor of habit formation as a relevant assumption to represent the joint behavior of the real interest rate and consumption growth following a monetary policy shock. Finally, we show that habit formation allows weakening the intertemporal substitution mechanism.

Résumé:

Résumé:

Ce papier étudie le rôle que peut jouer l’hypothèse de persistance des habitudes dans le comportement de consommation des ménages afin de reproduire le comportement joint de la croissance de la consommation et du taux d’intérêt réel à la suite d’un choc de politique monétaire. Une estimation d’un modèle SVAR, sur données américaines, montre qu’à la suite d’un choc contractionniste de politique monétaire, le taux d’intérêt réel augmente de façon persistante alors que la croissance de la consommation diminue de façon persistance. Le modèle standard de revenu permanent ne peut reproduire ce co-mouvement étant donné les mécanismes de substitution intertemporelle à l’œuvre dans ce type de modèle. C’est pourquoi, l’hypothèse de persistance des habitudes dans le comportement de consommation des ménages est introduite et étudiée dans cet article. L’équation d’Euler est testée en utilisant la méthodes des moments sur les moments conditionnels (IRF) obtenus à l’aide d’un modèle SVAR. Les estimations obtenus sont similaires aux résultats obtenus en utilisant d’autres méthodes. Par ailleurs, l’hypothèse de persistance des habitudes de consommation se révèle être empiriquement pertinente afin de reproduire le comportement joint du taux d’intérêt réel et de la croissance de la consommation à la suite d’un choc de politique monétaire. Enfin, cet article montre que la persistance des habitudes de consommation permet d’affaiblir le mécanisme de substitution intertemporelle.

Keywords

habit persistenceconsumption growthreal interest ratevector autoregressivemonetary policy shockE21E5Persistance des habitudesCroissance de la consommationtaux d’intérêt réelmodèles vectoriels auto régressifschocs de politique monétaireE21E5
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 74 , Issue 2 , 2008 , pp. 121 - 142
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2008 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We would like to thank the editor, Michel De Vroey, and two referees for insightful comments. We are grateful to the attendants to the VI Workshop on Dynamic Macroeconomics, Vigo, July 2001, to participants to the ESEM and EEA Congress, Lausanne, August 2001, to participants to the Journée d’Econométrie, Toulouse, February 2002, to the attendants to the VII Spring Meeting of Young Economists, Paris, April 2002 and to participants to ASSET Conference, Cyprus, October 2002. We have benefited from very helpful conversations with Paul Beaudry, Fabrice Collard, Patrick Fève, Alain Guay and Jean-Pierre Florens. We would like to thank Arianna Degan, Martial Dupaigne, Timothy Kehoe, Laëtitia Malavolti, Franck Portier, Victor Rios-Rull and Geneviève Verdier for helpful comments and discussions. Finally, we would like to thank S. Eppe for editorial assistance. The traditional disclaimer applies.

**

Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE. Correspondence address: Université Charles de Gaulle Lille 3, Maison de la recherche, Domaine Universitaire du Pont de Bois, BP149, 59653 Villeneuve d’Ascq cedex, France. Email: stephane.auray@univ-lille3.fr.

***

Université de Toulouse and GREMAQ.

References

Abel, A. (1990). “Asset Prices under Habit Formation and catching up with the Joneses,” American Economic Review, Papers and Proceedings, 80(2), 38–42.Google Scholar
Abel, A. (1999). “Risk Premia and Term Premia in General Equilibrium,” Journal of Monetary Economics, 43(1), 3–33.Google Scholar
Attanasio, O., and Weber, G. (1993). “Consumption Growth, the Interest Rate and Aggregation,” The Review of Economic Studies, 60(3), 631–649.Google Scholar
Beaudry, P., and Guay, A. (1996). “What Do Interest Rates Reveal about the Functioning of Real Business Cycle Models?,” Journal of Economic Dynamics and Control, 20(9–10), 1661–1682.Google Scholar
Braun, P., Constantidines, G., and Ferson, W. (1993). “Time Nonseparability in Aggregate Consumption,” European Economic Review, 37(5), 897–920.Google Scholar
Campbell, J., and Cochrane, J. (1999). “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy, 107(2), 205–251.Google Scholar
Campbell, J., and Deaton, A. (1989). “Why Is Consumption So Smooth?,” The Review of Economic Studies, 56(3), 357–374.Google Scholar
Campbell, J., and Mankiw, N. (1989). “Consumption, Income, and Interest Rates: reinterpreting the Time Series Evidence,” in N.B.E.R. Macroeconomics Annual, ed. by Blanchard, O., and Fischer, S.. Princeton University Press.Google Scholar
Campbell, J., and Mankiw, N. (1991). “The Response of Consumption to Income: a Cross-country Investigation,” European Economic Review, 35(4), 723–756.Google Scholar
Chapman, D. (1997). “The cyclical properties of consumption growth and the real term struture,” Journal of Monetary Economics, 39(2), 145–172.Google Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (1996). “The effects of Monetary Policy shocks: Evidence from Flow and Funds,” The Review of Economics and Statistics, LXXVIII, 17–34.Google Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (1999). “Monetary Policy Shocks: What Have we Learned and to What End?” in Handbook of Macroeconomics, ed. by Woodford, M., and Taylor, J., chap. 3. North-Holland.Google Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (2005). “Nominal Rigidities and the Dynamics Effects of a Shock to Monetary Policy,” Journal of Political Economy, 113(1), 1–45.Google Scholar
Constantinides, G. (1990). “Habit Formation: A Resolution of the Equity Premium Puzzle,” Journal of Political Economy, 98(3), 519–543.Google Scholar
Constantinides, G., and Ferson, W. E. (1991). “Habit Persistence and Durability in Aggregate Consumption,” Journal of Financial Economies, 29(2), 199–240.Google Scholar
Deaton, A. (1992). Understanding Consumption. Oxford university Press, New York.Google Scholar
Dunn, K., and Singleton, K. (1986). “Modelling the Term Structure of Interest Rates under Habit Formation and Durability of Goods,” Journal of Financial Economics, 17(1), 27–55.Google Scholar
Fuhrer, J. (2000). “Habit Formation in Consumption and Its Implications for Monetary-Policy Models,” American Economic Review, 90(3), 367–390.Google Scholar
Gouriéroux, C., and Monfort, A. (1996). Statistiques et Modèles Econométriques. Economica, Paris.Google Scholar
Hall, R. (1978). “Stochastic Implications of the Life-Cycle/Permanent Income Hypothesis: Theory and Evidence,” Journal of Political Economy, 86(6), 971–987.Google Scholar
Hall, R. (1988). “Intertemporal Substitution in Consumption,” Journal of Political Economy, 96(2), 339–357.Google Scholar
Hall, R., and Mishkin, F. (1982). “The Sensitivity of Consumption to Transitory Income: Estimates from Panel data on Households,” Econometrica, 50(2), 461–481.Google Scholar
Hansen, L. (1982). “Large Sample Properties of Generalized Method of Moments estimators,” Econometrica, 50(4), 1029–1054.Google Scholar
Heaton, J. (1995). “An Empirical Investigation of Asset Pricing with Temporally Dependent Preferences Specification,” Econometrica, 63(3), 681–717.Google Scholar
Leeper, E., Sims, C., and Zha, T. (1996). “What Does Monetary Policy Do?,” Brookings Papers on Economic Activity, 2, 1–63.Google Scholar
Lucas, R. (1990). “Liquidity and Interest Rates,” Journal of Economic Theory, 50(1), 237–264.Google Scholar
Naik, N., and Moore, M. (1996). “Habit Formation and Intertemporal Substitution in Individual Food Consumption,” The Review of Economics and Statistics, 78(2), 321–328.Google Scholar
Sims, C. (1992). “Interpreting the Macroeconomic Time Series Facts: The effects of Monetary Policy,” European Economic Review, 36(5), 975–1000.Google Scholar
Sundaresan, S. (1989). “Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth,” The Review of Financial Studies, 2(1), 73–89.Google Scholar