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Saving and Habit Formation: Evidence from Dutch Panel Data

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Author Info
Rob Alessie () (Vrije Universiteit Amsterdam)
Federica Teppa () (CentER, Tilburg University)

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Abstract

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

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 02-076/3.

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Date of creation: 15 Jul 2002
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Handle: RePEc:dgr:uvatin:20020076

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Related research
Keywords: Habit formation permanent income precautionary saving.

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Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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Full references

Cited by:
(explanations, 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. Viola Angelini, 2006. "Consumption and Habit Formation when Time Horizon is Finite," Discussion Papers 06/27, Department of Economics, University of York. [Downloadable!]
  2. 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. [Downloadable!]
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