Saving and Growth with Habit Formation
Working Paper No 95-42
Posted: 23 Aug 1998
Standard growth models take the form of a representative consumer maximizing an intertemporally separable utility function. We explore the implications of one kind of nonseparability by allowing utility to depend on a comparison of consumption to a "habit stock" determined by past consumption. Our model is consistent with some empirical findings which are problematic for standard models. For example, Carroll and Weil (1994) find that aggregate saving rates increase after increases in the aggregate growth rate, even though growth rates are positively serially correalated; the standard model would predict a decline in saving as consumers spent part of their anticipated higher future income.
JEL Classification: D91, E21, O40
Suggested Citation: Suggested Citation