Precautionary savings and wealth distribution under habit formation preferences

Antonia Díaz, Josep Pijoan-Mas, José Victor Ríos-Rull

Research output: Contribution to journalArticlepeer-review

54 Scopus citations

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 coefficient 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.

Original languageEnglish (US)
Pages (from-to)1257-1291
Number of pages35
JournalJournal of Monetary Economics
Volume50
Issue number6
DOIs
StatePublished - Sep 2003

Keywords

  • Habit formation
  • Precautionary savings
  • Wealth distribution

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