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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
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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 

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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.

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