Saving and Habit Formation: Evidence from Dutch Panel Data

R.J.M. Alessie, F. Teppa

Research output: Working paperDiscussion paperOther research output

259 Downloads (Pure)

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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages26
Volume2002-62
Publication statusPublished - 2002

Publication series

NameCentER Discussion Paper
Volume2002-62

Fingerprint

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

Keywords

  • preferences
  • savings
  • incomes
  • habit formation

Cite this

Alessie, R. J. M., & Teppa, F. (2002). Saving and Habit Formation: Evidence from Dutch Panel Data. (CentER Discussion Paper; Vol. 2002-62). Tilburg: Econometrics.
Alessie, R.J.M. ; Teppa, F. / Saving and Habit Formation : Evidence from Dutch Panel Data. Tilburg : Econometrics, 2002. (CentER Discussion Paper).
@techreport{60427e7c434b4fbca05de64890958628,
title = "Saving and Habit Formation: Evidence from Dutch Panel Data",
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 = "preferences, savings, incomes, habit formation",
author = "R.J.M. Alessie and F. Teppa",
note = "Subsequently published in Empirical Economics, 2010 Pagination: 26",
year = "2002",
language = "English",
volume = "2002-62",
series = "CentER Discussion Paper",
publisher = "Econometrics",
type = "WorkingPaper",
institution = "Econometrics",

}

Alessie, RJM & Teppa, F 2002 'Saving and Habit Formation: Evidence from Dutch Panel Data' CentER Discussion Paper, vol. 2002-62, Econometrics, Tilburg.

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

Tilburg : Econometrics, 2002. (CentER Discussion Paper; Vol. 2002-62).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Saving and Habit Formation

T2 - Evidence from Dutch Panel Data

AU - Alessie, R.J.M.

AU - Teppa, F.

N1 - Subsequently published in Empirical Economics, 2010 Pagination: 26

PY - 2002

Y1 - 2002

N2 - 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.

AB - 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.

KW - preferences

KW - savings

KW - incomes

KW - habit formation

M3 - Discussion paper

VL - 2002-62

T3 - CentER Discussion Paper

BT - Saving and Habit Formation

PB - Econometrics

CY - Tilburg

ER -

Alessie RJM, Teppa F. Saving and Habit Formation: Evidence from Dutch Panel Data. Tilburg: Econometrics. 2002. (CentER Discussion Paper).