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Saving and Growth with Habit Formation

  • Jody Overland
  • Christopher D. Carroll
  • David N. Weil

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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.3.341
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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
Note: DOI: 10.1257/aer.90.3.341
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