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Saving and growth with habit formation

  • Christopher D. Carroll
  • Jody Overland
  • 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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 95-42.

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Date of creation: 1995
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Handle: RePEc:fip:fedgfe:95-42
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  1. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  2. Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
  3. William Easterly & Michael Kremer & Lant Pritchett & Lawrence H. Summers, 1993. "Good Policy or Good Luck? Country Growth Performance and Temporary Shocks," NBER Working Papers 4474, National Bureau of Economic Research, Inc.
  4. 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.
  5. Christopher D. Carroll & David N. Weil, 1993. "Saving and Growth: A Reinterpretation," NBER Working Papers 4470, National Bureau of Economic Research, Inc.
  6. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  7. Mulligan, C.B. & Sala-i-Martin, X., 1992. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," Papers 651, Yale - Economic Growth Center.
  8. 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.
  9. 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.
  10. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 1-33, January.
  11. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-83, March.
  12. Deaton, A.S. & Paxson, C.H., 1992. "Saving, Growth, and Aging in Taiwan," Papers 161, Princeton, Woodrow Wilson School - Development Studies.
  13. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  14. Loayza, N. & Schmidt, K. & Serven, L., 1999. "What Drives Private Saving Across the World?," Papers 47, Cambridge - Risk, Information & Quantity Signals.
  15. Sydney Ludvigson & Christina H. Paxson, 1999. "Approximation Bias in Linearized Euler Equations," NBER Technical Working Papers 0236, National Bureau of Economic Research, Inc.
  16. King, Robert G. & Levine, Ross, 1994. "Capital fundamentalism, economic development, and economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 259-292, June.
  17. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  18. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
  19. 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.
  20. 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.
  21. 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.
  22. Williamson, Jeffrey G., 1979. "Why do Koreans save so little?," Journal of Development Economics, Elsevier, vol. 6(3), pages 343-362, August.
  23. 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.
  24. repec:ner:tilbur:urn:nbn:nl:ui:12-364325 is not listed on IDEAS
  25. 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.
  26. 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.
  27. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  28. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  29. 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.
  30. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, October.
  31. 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.
  32. Christina Paxson, 1995. "Saving and Growth: Evidence from Micro Data," NBER Working Papers 5301, National Bureau of Economic Research, Inc.
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