Do Habits Raise Consumption Growth?

The paper shows that two of the most common specifications of habits - the multiplicative specification and the subtractive specification - may easily come to opposite conclusions regarding household behavior. In response to an increase in the strength of habits, young households increase the rate of consumption growth in the case of subtractive habits, while they lower the rate of consumption growth in the case of the multiplicative specification of habit formation. This result reflects the fact that, contrary to what is suggested by the literature so far, there exists no generally accepted definition of habits in terms of what habits imply for household behavior