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Habit Formation and Its Impact on Macroeconomics: A Survey
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TitleHabit Formation and Its Impact on Macroeconomics: A Survey  
AuthorYan Chengliang, Cui Xiaoyong and Wang Dihai  
OrganizationSchool of Economics, Central University of Finance and Economics;China Economics and Management Academy, Central University of Finance and Economics;School of Economics, Fudan University;; 
Key WordsHabit Formation; Consumption Habit; Business Cycle; Economic Growth; Macro Policy 
AbstractThe utility function in the Ramsey model is time separable, and it is widely used in macroeconomics for its simplicity. However, some empirical works find that the results derived in the Ramsey model could not be reconciled with the stylized fact of the economy. Therefore, Economists try to improve the Ramsey model by correcting the utility function. Habit formation is introduced in the Ramsey model in 1980s, and its introduction has deepened our understanding of the reality. This paper gives the definition of habit formation, and then we introduce the major framework of habit formation. The emphasis of this paper is to discuss the application of habit formation in the theory of consumption, saving, business cycle, economic growth, macro policy and asset pricing. Lastly, we point out the shortcomings of habit formation model and discuss its future development. 
Serial NumberWP153 
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