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Difference or Ratio: Implication of Status Preference on Stagnation

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  • Yoshiyasu Ono
  • Katsunori Yamada

Abstract

We consider a dynamic macroeconomic model of households that regard relative affluence as social status. The measure of relative affluence can be the ratio to, or the difference from, the social average. The two specifications lead to quite different results: under the ratio specification full employment is necessarily realized, whereas under the difference specification there is a case where a persistent shortage of aggregate demand arises. Affluence comparison experiments provide empirical indications that the difference specification is far more persuasive than the ratio specification. Therefore, persistent stagnation may well occur.

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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0856.

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Date of creation: Oct 2012
Date of revision: Mar 2013
Handle: RePEc:dpr:wpaper:0856

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