Consumption Externalities, Heterogeneous Agents and Cycles
AbstractThis paper studies the e¤ect of consumption externalities in a Ramsey model with heterogeneous agents and borrowing constraints. We consider two types of agents who di¤er in their initial wealth and discount factors. Further, we leave open the possibility of increase in consumption of one agent producing a positive (Keeping-Up with the Joneses) or a negative (Running-Away from the Joneses) effet over the marginal utility from own consumption of the other agent. We show that, at a steady-state equi- librium, inequality arises across agents which in turn implies that, agents have different consumption levels. Moreover, we show that, whenever the preferences display Keeping-Up with the Joneses feature, low elasticity of production factors substitution is no longer needed for the emergence of flip cycles and instability. Instead, only the external effects in consump- tion that plays a crucial role and promotes instability and the appearence of these endogeneous cycles.
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Bibliographic InfoPaper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 09-02.
Length: 16 pages
Date of creation: 2009
Date of revision:
Consumption externalities; borrowing constraints; hetero- geneous agents; saddle-path stability; endogeneous cycles;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
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