Habits and Time Preference

This paper proposes a utility function incorporating both habit formation and an endogenous rate of time preference in a manner consistent with the intuition of Irving Fisher regarding the influence of past consumption on impatience. It is shown that the ne w specification is tractable and generates new predictions in the cont ext of three model economies: (1) a closed economy with heterogeneous agents, (2) a small open economy with one traded good and one nontra ded good, and (3) a small open economy with a traded good and domestic money. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.