²Facts that have been interpreted using habit formation models include the equity premium puzzle (Constantinides (1990) and Campbell, John Y. and Cochrane (1999)), Granger causality from growth rates to saving rates (Carroll, Overland, and Weil (2000)), the hump-shaped response of consumption to income shocks (Fuhrer (2000)), the dynamic effects of fiscal policy (Ljungqvist and Uhlig (2000)), persistence in current account balances (Gruber (2004)), and the home bias puzzle (Shore and White (2006)). (We do not distinguish here between ‘internal’ and ‘external’ habits models because in our view they are empirically indistinguishable using macroeconomic data; see Carroll, Overland, and Weil (1997) for the argument.)