Saving and Habit Formation: Evidence from Dutch Panel Data

Tinbergen Institute Discussion Paper No. 2002-076/3

Posted: 4 Mar 2003

See all articles by Rob Alessie

Rob Alessie

Utrecht University - School of Economics; VU University Amsterdam - Department of Economics

Federica Teppa

Center for Research on Pensions and Welfare Policies (CeRP) - Department of Economics and Finance

Date Written: July 2002

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.

Keywords: Habit formation, permanent income, precautionary saving

JEL Classification: D91

Suggested Citation

Alessie, R.J.M. (Rob) and Teppa, Federica, Saving and Habit Formation: Evidence from Dutch Panel Data (July 2002). Tinbergen Institute Discussion Paper No. 2002-076/3. Available at SSRN: https://ssrn.com/abstract=321024

R.J.M. (Rob) Alessie (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
31 30 253 9814 (Phone)
31 30 253 7373 (Fax)

HOME PAGE: http://www2.econ.uu.nl/users/alessie/

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31 20 444 6047 (Phone)
+31 20 444 6005 (Fax)

Federica Teppa

Center for Research on Pensions and Welfare Policies (CeRP) - Department of Economics and Finance ( email )

Via Real Collegio, 30
Moncalieri, Torino 10024
Italy
+39 11 6476 518 (Phone)
+39 11 6403 680 (Fax)

HOME PAGE: http://cerp.unito.it/Persone/ricercatori/cv_federica_teppa.htm

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