This paper finds that a benchmark model of habit formation in consumer preferences can explain two well-known failures of the permanent income hypothesis: the sensitivity of aggregate consumption to predictable changes in income and to lagged consumer sentiment. One novel feature of the paper's...

We examined the evidence of precautionary saving and Constantinides (1990) type habit formation model by using the Korean Household Panel Studies, which has six years of time series observations and thousands of cross section observations. Employing the dynamic panel data estimation method, we...