Intertemporally dependent preferences and the volatility of consumption and wealth

In this article we construct a model in which a consumer's utilitydepends on the consumption history. We describe a general equilibriumframework similar to Cox, Ingersoll, and Ross (1985a). A simpleexample is then solved in closed form in this general equilibriumsetting to rationalize the observed stickiness of the consumptionseries relative to the fluctuations in stock market wealth.The sample paths of consumption generated from this model implylower variability in consumption growth rates compared to thosegenerated by models with separable utility functions. We thenpresent partial equilibrium model similar to Merton (1969, 1971)and extend Merton's results on optimal consumption and portfoliorules to accommodate nonseparability in preferences. Asset pricingimplications of our framework are briefly explored.