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Consumption externalities and equilibrium dynamics with heterogeneous agents

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  • Mino, Kazuo
  • Nakamoto, Yasuhiro

Abstract

This paper explores the effect of consumption externalities on equilibrium dynamics of a standard neoclassical growth model in which there are two types of agents. To emphasize the presence of heterogeneous agents, we distinguish intergroup consumption externalities from intragroup consumption externalities. We show that if there are intragroup consumption externalities alone, then the steady state equilibrium satisfies saddle-point stability and the equilibrium path of the economy is uniquely determined. In contrast, even if the intragroup consumption externalities do not exist, the intergroup external effects of consumption may yield either instability or local indeterminacy of the steady-state equilibrium. In addition to analytical considerations, we show the relationship between the stability and the consumption externalities in numerical examples.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 64 (2012)
Issue (Month): 3 ()
Pages: 225-233

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Handle: RePEc:eee:matsoc:v:64:y:2012:i:3:p:225-233

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Web page: http://www.elsevier.com/locate/inca/505565

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  1. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2005. "Can consumption spillovers be a source of equilibrium indeterminacy?," UFAE and IAE Working Papers 657.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  2. Sarte, Pierre-Daniel G., 1997. "Progressive taxation and income inequality in dynamic competitive equilibrium," Journal of Public Economics, Elsevier, vol. 66(1), pages 145-171, October.
  3. Kazuo Mino, 2007. "Growth and Bubbles with Consumption Externalities," Discussion Papers in Economics and Business 07-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
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  7. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  8. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
  9. Chen, Been-Lon & Hsu, Mei, 2007. "Admiration is a source of indeterminacy," Economics Letters, Elsevier, vol. 95(1), pages 96-103, April.
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  11. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  12. Garriga, Carlos, 2006. "Overconsumption, reference groups, and equilibrium efficiency," Economics Letters, Elsevier, vol. 91(3), pages 420-424, June.
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  14. Li Wenli & Pierre -Daniel Sarte, 2004. "Progressive Taxation and Long-Run Growth," American Economic Review, American Economic Association, vol. 94(5), pages 1705-1716, December.
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Cited by:
  1. Kazuo Mino & Yasuhiro Nakamoto, 2009. "Consumption Externalities and Wealth Distribution in a Neoclassical Growth Model," KIER Working Papers 683, Kyoto University, Institute of Economic Research.

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