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Saving and Growth with Habit Formation

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Author Info
Christopher D. Carroll
Jody Overland
David N. Weil

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Abstract

Saving 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.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 3 (June)
Pages: 341-355
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Handle: RePEc:aea:aecrev:v:90:y:2000:i:3:p:341-355

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mulligan, Casey B & Sala-i-Martin, Xavier, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 739-73, August. [Downloadable!] (restricted)
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  2. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Christopher D. Carroll & Jody Overland & David N. Weil, 1997. "Comparison Utility in a Growth Model," NBER Working Papers 6138, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Christina Paxson, 1995. "Saving and Growth: Evidence from Micro Data," NBER Working Papers 5301, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. King, Robert G. & Levine, Ross & DEC, 1994. "Capital fundamentalism, economic development, and economic growth," Policy Research Working Paper Series 1285, The World Bank. [Downloadable!]
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  6. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 133-192, June. [Downloadable!] (restricted)
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  7. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2.
  8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June. [Downloadable!] (restricted)
  10. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  12. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
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  13. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December. [Downloadable!] (restricted)
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  14. Angus S. Deaton & Christina Paxson, 1994. "Saving, Growth, and Aging in Taiwan," NBER Chapters, in: Studies in the Economics of Aging, pages 331-362 National Bureau of Economic Research, Inc. [Downloadable!]
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  15. Williamson, Jeffrey G., 1979. "Why do Koreans save so little?," Journal of Development Economics, Elsevier, vol. 6(3), pages 343-362, August. [Downloadable!] (restricted)
  16. Carroll, Christopher D & Rhee, Byung-Kun & Rhee, Changyong, 1994. "Are There Cultural Effects on Saving? Some Cross-Sectional Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 685-99, August. [Downloadable!] (restricted)
  17. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April. [Downloadable!] (restricted)
  18. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Blackwell Publishing, vol. 40(1), pages 1-33, January. [Downloadable!] (restricted)
  19. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June. [Downloadable!] (restricted)
  20. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc. [Downloadable!]
  21. Matthew D. Shapiro & Joel Slemrod, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
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  23. Christopher D. Carroll, 1997. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," NBER Working Papers 6298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  24. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September. [Downloadable!] (restricted)
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  25. van de Stadt, Huib & Kapteyn, Arie & van de Geer, Sara, 1985. "The Relativity of Utility: Evidence from Panel Data," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 179-87, May. [Downloadable!] (restricted)
  26. Jeffrey C. Fuhrer & Michael W. Klein, 1998. "Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations," NBER Working Papers 6735, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  27. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May. [Downloadable!] (restricted)
  28. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June. [Downloadable!] (restricted)
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  29. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July. [Downloadable!] (restricted)
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