Saving and Growth with Habit Formation
- (pp. 341-355)
AbstractSaving and growth are strongly positively correlated across countries. Recent empirical evidence suggests that this correlation holds largely because high growth leads to high saving, not the other way around. This evidence is difficult to reconcile with standard growth models, since forward-looking consumers with standard utility should save less in a fast-growing economy because they know they will be richer in the future than they are today. We show that if utility depends partly on how consumption compares to a "habit stock" determined by past consumption, an otherwise-standard growth model can imply that increases in growth can cause increased saving.
Citation2000. "Saving and Growth with Habit Formation." American Economic Review, 90(3): 341-355. DOI: 10.1257/aer.90.3.341
- E21 Macroeconomics: Consumption; Saving; Wealth
- O41 One, Two, and Multisector Growth Models
- D91 Intertemporal Consumer Choice; Life Cycle Models and Saving