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Habit Formation and the Gains from Price Stability
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Journal Article
Habit Formation and the Gains from Price Stability
2012
Overview
A counter-intuitive result from consumer theory is that consumers facing stable prices will benefit from a mean-preserving spread of those prices. This article explores a new explanation for why the common intuition that price volatility is undesirable may be correct: the presence of habit formation in consumption. If prices are fluctuating, and preferences depend on past consumption, in every period the most favored goods can also be the most expensive ones, with negative consequences for both welfare and nutrition.
Publisher
Univ. Press,Oxford University Press
Subject
