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Anticipated Consumption and its Impact on Capital Accumulation and Growth: 'Forward-Looking' vs. 'Backward-Looking' Consumption Reference

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  • Goncalo Monteiro
  • Stephen Turnovsky

Abstract

It has long been argued that the anticipations of some future event will impact current consumption and well-being in advance of the occurrence of the event itself. This paper introduces this idea of anticipated pleasure into the Ramsey growth model, by assuming that in addition to his own current consumption, an agent’s current utility depends upon a reference consumption level that is based on expected future consumption. Two alternative specifications of the anticipated future consumption levels are considered: an external index and an internal index. We analyze the macrodynamic equilibrium, comparing it to both the standard Ramsey model, and the more familiar parallel model of habit formation. We establish a number of theoretical propositions characterizing the impact of the anticipated consumption reference on the transitional dynamics and long-run equilibrium, supplementing these with extensive numerical simulations.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-12/cesifo1_wp4536.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4536.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4536

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Keywords: anticipated consumption; capital accumulation;

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  3. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(2), pages 199-240, October.
  4. Francisco Alvarez & Goncalo Monteiro, 2003. "Habit Formation, Catching up with the Joneses, and Non-Scale Growth," Computing in Economics and Finance 2003 289, Society for Computational Economics.
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  8. Faria, Joao Ricardo & McAdam, Peter, 2012. "Anticipation of future consumption: a monetary perspective," Working Paper Series, European Central Bank 1448, European Central Bank.
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  10. Phillip A. Braun & George M. Constantinides & Wayne E. Ferson, 1992. "Time Nonseparability in Aggregate Consumption: International Evidence," NBER Working Papers 4104, National Bureau of Economic Research, Inc.
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  13. Boyer, Marcel, 1978. "A Habit Forming Optimal Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(3), pages 585-609, October.
  14. Kandel, Shmuel & Kuznitz, Arik, 2004. "A Portfolio Choice Model with Utility from Anticipation of Future Consumption and Stock Markets' Mean Reversion," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4701, C.E.P.R. Discussion Papers.
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  18. Botond Koszegi & Matthew Rabin, 2006. "Reference-Dependent Risk Attitudes," Levine's Bibliography 122247000000001267, UCLA Department of Economics.
  19. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(1), pages 55-79, February.
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  21. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 367-390, June.
  22. Mansoorian, Arman, 1998. "Habits and durability in consumption, and the dynamics of the current account," Journal of International Economics, Elsevier, Elsevier, vol. 44(1), pages 69-82, February.
  23. Kamien, Morton I. & Schwartz, Nancy L., 1971. "Sufficient conditions in optimal control theory," Journal of Economic Theory, Elsevier, Elsevier, vol. 3(2), pages 207-214, June.
  24. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1665-1691, August.
  25. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 391-406, June.
  26. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 356-366, June.
  27. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  28. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(387), pages 666-84, September.
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