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Saving and habit formation: evidence from Dutch panel data

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  • Rob Alessie

    ()

  • Federica Teppa

    ()

Abstract

This paper focuses on the role of habit formation in individual preferencesover consumption and saving. We closely relate to Alessie and Lusardi's(1997) model as we estimate a model which is based on their closed-formsolution, where saving is expressed as a function of lagged saving and otherregressors. Alternatively, we could use an Euler-equation approach (see e.g.Guariglia and Rossi (2001) and Dynan (2000)), but we will argue that thisapproach may yield spuriously negative estimates of the habit formationparameter because in surveys consumption is typically measured withconsiderable error. A second reason to use the closed form solution as abasis of the empirical model is that it embodies more information about thehabit formation model than the Euler equation. Therefore, the closed formsolution allows for a more powerful test of the validity of the habitformation model than the Euler equation approach.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 38 (2010)
Issue (Month): 2 (April)
Pages: 385-407

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Handle: RePEc:spr:empeco:v:38:y:2010:i:2:p:385-407

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Keywords: Habit formation; Permanent income; Precautionary savings; Panel data; D91;

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References

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Citations

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Cited by:
  1. Jürgen Maurer & André Meier, 2005. "Do the "Joneses" really matter? Peer-group versus correlated effects in intertemporal consumption choice," IFS Working Papers W05/15, Institute for Fiscal Studies.
  2. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," IMK Working Paper 99-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Manuela Deidda, 2014. "Precautionary saving under liquidity constraints: evidence from Italy," Empirical Economics, Springer, vol. 46(1), pages 329-360, February.
  4. Driscoll, John C. & Holden, Steinar, 2014. "Behavioral Economics and Macroeconomic Models," Finance and Economics Discussion Series 2014-43, Board of Governors of the Federal Reserve System (U.S.).
  5. Jürgen Maurer & André Meier, 2008. "Smooth it Like the 'Joneses'? Estimating Peer-Group Effects in Intertemporal Consumption Choice," Economic Journal, Royal Economic Society, vol. 118(527), pages 454-476, 03.
  6. Martin Beznoska & Richard Ochmann, 2013. "The interest elasticity of household savings: a structural approach with German micro data," Empirical Economics, Springer, vol. 45(1), pages 371-399, August.
  7. Angelini, Viola, 2009. "Consumption and habit formation when time horizon is finite," Economics Letters, Elsevier, vol. 103(2), pages 113-116, May.
  8. Silva, Andres & Dharmasena, Senarath, 2013. "Modeling Seasonal Unit Roots as a Simple Empirical Method to Handle Autocorrelation in Demand Systems: Evidence from UK Expenditure Data," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149928, Agricultural and Applied Economics Association.
  9. Federica Teppa & Corrie Vis, 2012. "The CentERpanel and the DNB Household Survey: Methodological Aspects," DNB Occasional Studies 1004, Netherlands Central Bank, Research Department.
  10. Fusaro, Marc Anthony & Dutkowsky, Donald H., 2011. "What explains consumption in the very short-run? Evidence from checking account data," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 542-552.
  11. Davoine, Thomas, 2012. "Time constraints, saving and old age," Economics Working Paper Series 1221, University of St. Gallen, School of Economics and Political Science.

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