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American Economic Review Vol. 90 No. 3 2000

Saving and Growth with Habit Formation

Christopher D. Carroll1; Jody Overland2; David Weil3

1 Department of Economics, 440 Mergenthaler Hall, Johns Hopkins University, Baltimore, MD 21218, and National Bureau of Economic Research. · 2 Unlisted · 3 Department of Economics, Box B, Brown University, Providence, RI 02912, and National Bureau of Economic Research.

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.

DOI
10.1257/aer.90.3.341
Volume
90
Issue
3
Pages
341-355
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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