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Optimal growth when tastes are inherited

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Author Info
de la Croix, David (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))
Michel, Philippe (UniversitŽ de la MŽditerranŽe, IUF; GREQAM, Marseille)

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Abstract

We address the issue of optimal growth when standard-of-living aspirations are transmitted from one generation to the next. We derive the condition for the optimal solution to be stable in the saddle-point sense and show that this optimal solution may display damped oscillations even when the planner does not discount the utility of future generations (golden rule case). The decentralization of the optimal solution aims at correcting the inter-generational externality by use of an investment subsidy and allows to avoid socially damaging rushes on consumption in expansion periods. It also allows to stabilize output in the case of competitive economies displaying endogenous fluctuations.

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Publisher Info
Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997012.

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Length: 16
Date of creation: 01 Mar 1997
Date of revision: 00 Jun 1997
Handle: RePEc:ctl:louvir:1997012

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Related research
Keywords: Externality; saddle-point stability; golden rule; oscillations; investment subsidy; stabilisation;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Blackwell Publishing, vol. 40(1), pages 1-33, January. [Downloadable!] (restricted)
  2. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May. [Downloadable!] (restricted)
    Other versions:
  3. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  4. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Farmer, Roger E. A., 1986. "Deficits and cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 77-88, October. [Downloadable!] (restricted)
  6. Pashardes, Panos, 1986. "Myopic and Forward Looking Behavior in a Dynamic Demand System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 387-97, June. [Downloadable!] (restricted)
  7. Clark, Andrew E. & Oswald, Andrew J. & Warr, Peter B., 1994. "Is job satisfaction u-shaped in age ?," CEPREMAP Working Papers (Couverture Orange) 9407, CEPREMAP.
  8. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October. [Downloadable!] (restricted)
  9. Levhari, David & Liviatan, Nissan, 1972. "On stability in the saddle-point sense," Journal of Economic Theory, Elsevier, vol. 4(1), pages 88-93, February. [Downloadable!] (restricted)
  10. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September. [Downloadable!] (restricted)
  11. Becker, G.S., 1991. "Habits, Addictions, and Traditions," University of Chicago - Economics Research Center 91-8, Chicago - Economics Research Center.
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  12. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May. [Downloadable!] (restricted)
  13. Philippe Michel & Alain Venditti, 1997. "Optimal growth and cycles in overlapping generations models (*)," Economic Theory, Springer, vol. 9(3), pages 511-528.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew B. Abel, 2003. "Optimal Taxation When Consumers Have Endogenous Benchmark Levels of Consumption," NBER Working Papers 10099, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Barnett, Richard C & Bhattacharya, Joydeep & Bunzel, Helle, 2008. "Deviant Generations, Ricardian Equivalence, and Growth Cycles," Staff General Research Papers 12939, Iowa State University, Department of Economics. [Downloadable!]
  3. David Delacroix & Philippe Michel, 2001. "Altruism and Self-Restraint," Annales d'Economie et de Statistique, ADRES, issue 63-64, pages 13, Juillet-D. [Downloadable!]
  4. Basant Kapur, 2005. "Can faster income growth reduce well-being?," Social Choice and Welfare, Springer, vol. 25(1), pages 155-171, October. [Downloadable!] (restricted)
  5. Patrick Toche, 2001. "Keeping Up With the Joneses and Unemployment Risk," Economics Series Working Papers 063, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  6. Richard C. Barnett & Joydeep Bhattacharya, 2007. "Rejuveniles and Growth," Economics Working Papers 2007-11, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  7. Jordi Caballé & Ana I. Moro Egido, 2008. "The Effect of Aspirations, Habits, and Social Security on the Distribution of Wealth," ThE Papers 08/02, Department of Economic Theory and Economic History of the University of Granada.. [Downloadable!]
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