Precautionary Savings and Wealth Distribution Under Habit Formation Preferences

Antonia Díaz, Josep Pijoan-Mas and José-Víctor Ríos-Rull

Working Papers from CEMFI

Abstract: We study the role of habit formation in shaping the amount of precautionary savings and the wealth distribution in heterogeneous agents model economies with idiosyncratic uncertainty. We adjust preferences to equate the Intertemporal Elasticity of Substitution in all model economies. We find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coe.cient of variation and in the Gini index of wealth. These findings hold for both persistent and non persistent habits, with the effects of the former being much larger.

Date: 2002
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Journal Article: Precautionary savings and wealth distribution under habit formation preferences (2003)
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