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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@equilibrium consequences: 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. Furthermore, using data of an affluence comparison experiment we empirically find that the difference specification fits the data better than the ratio specification. Therefore, affluence comparison can be a cause of persistent stagnation.

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

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Date of creation: Oct 2012
Date of revision: Jan 2014
Handle: RePEc:dpr:wpaper:0856rr

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