Saving and Growth with Habit Formation

Jody Overland (), Christopher Carroll and David Weil

American Economic Review, 2000, vol. 90, issue 3, 341-355

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.

JEL-codes: D91 E21 O41 (search for similar items in EconPapers)
Date: 2000
Note: DOI: 10.1257/aer.90.3.341
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Citations: View citations in EconPapers (497)

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Software Item: Mathematica code for 'Saving and Growth with Habit Formation' and 'Comparison Utility in a Growth Model' (2000)
Working Paper: Saving and growth with habit formation (1995)
Working Paper: Saving and growth with habit formation (1995)
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