Home  Journals  Financial Analytics: Science and Experience  3(285) - 2016 January

Specifics of consumption trends in general equilibrium models: the role of consumption habits

Vol. 9, Iss. 3, JANUARY 2016

Article PDF Version

Received: 13 November 2015

Received in revised form: 16 December 2015

Accepted: 22 December 2015

Available online: 27 January 2016

Subject Heading: ECONOMIC AND STATISTICAL RESEARCH

JEL Classification: E21, E27

Pages: 49-60

Importance The article examines the role of consumption habits in relation to household consumption trends in macroeconomic models.
     Objectives The research identifies how consumption habits influence trends in the main variables of macroeconomic models of general equilibrium.
     Methods The research formulates an individual’s utility function in two formats, i.e. with and without consumption habits. Based on the Smets–Wouters dynamic stochastic general equilibrium, we analyze trends in the model and two specifications of it under shocks. We compare functions of impulse response for real variables. The article presents a statistical analysis of trends in real ultimate consumption of the Russian households. The research draws upon statistical data on real consumption of non-durable goods within the 2008–2009 global financial crisis and afterwards.
     Results Two specifications of the DSGE model initially respond to shocks in a different way. Additional rigidity of the model allows simulating the postponed response of real variables to economic shocks. The consumption data demonstrate the postponed response of real expenses to changes in fundamental indicators, and the protracted effect of adaptation to a new equilibrium.
     Conclusions and Relevance When habits are included, it allows modeling a postponed and domed response of real expenses to economic shocks, being basically consistent with the data on the Russian economy.

Keywords: consumption, consumption habit, DSGE model

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