Endogenous Growth and Equilibrium Cycles under Altruistic and Envious Preferences

This study examines how habit persistence in preferences affects short- and long-run economic growth in a dynamic competitive economy and addresses the possibility of equilibrium cycles in the presence of habit persistence in preferences. The study shows a continuum of transitional competitive equilibrium paths, each of which converges to a unique balanced growth path when external habits influence a household’s preferences and when a firm’s productivities increase in public capital services financed by consumption taxes. The self-fulfilling sunspot equilibrium path exhibits equilibrium cycles under altruistic or envious preferences in a growing competitive economy with exogenous fiscal policies. The study also demonstrates that a distortionary fiscal policy, including consumption tax, acts as a stabilizer for sunspot-driven fluctuations among rational expectation agents, selects a unique transitional path around the unique balance growth path, and eradicates equilibrium cycles in the social optimum.