Saving and Habit Formation: Evidence from Dutch Panel Data

R.J.M. Alessie, Federica Teppa

Research output: Working paperProfessional

Abstract

This paper focuses on the role of habit formation in individual preferencesover consumption and saving. We closely relate to Alessie and Lusardi's(1997) model as we estimate a model which is based on their closed-formsolution, where saving is expressed as a function of lagged saving and otherregressors. Alternatively, we could use an Euler-equation approach (see e.g.Guariglia and Rossi (2001) and Dynan (2000)), but we will argue that thisapproach may yield spuriously negative estimates of the habit formationparameter because in surveys consumption is typically measured withconsiderable error. A second reason to use the closed form solution as abasis of the empirical model is that it embodies more information about thehabit \ formation model than the Euler equation. Therefore, the closed formsolution allows for a more powerful test of the validity of the habitformation model than the Euler equation approach.
Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Instituut
Publication statusPublished - 2002

Publication series

NameDiscussion paper TI
No.02-076/3

Fingerprint

Panel data
Habit formation
Euler equations
Closed-form solution
Consumption and saving
Habit
Empirical model

Cite this

Alessie, R. J. M., & Teppa, F. (2002). Saving and Habit Formation: Evidence from Dutch Panel Data. (Discussion paper TI; No. 02-076/3). Amsterdam: Tinbergen Instituut.
Alessie, R.J.M. ; Teppa, Federica. / Saving and Habit Formation: Evidence from Dutch Panel Data. Amsterdam : Tinbergen Instituut, 2002. (Discussion paper TI; 02-076/3).
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Alessie, RJM & Teppa, F 2002 'Saving and Habit Formation: Evidence from Dutch Panel Data' Discussion paper TI, no. 02-076/3, Tinbergen Instituut, Amsterdam.

Saving and Habit Formation: Evidence from Dutch Panel Data. / Alessie, R.J.M.; Teppa, Federica.

Amsterdam : Tinbergen Instituut, 2002. (Discussion paper TI; No. 02-076/3).

Research output: Working paperProfessional

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Alessie RJM, Teppa F. Saving and Habit Formation: Evidence from Dutch Panel Data. Amsterdam: Tinbergen Instituut. 2002. (Discussion paper TI; 02-076/3).