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Consequences of Modeling Habit Persistence

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  • Pere Gomis-Porqueras

    ()
    (Department of Economics, University of Miami)

  • Luca Bossi

    ()
    (Department of Economics, University of Miami)

Abstract

In this paper, we study the stationary and non-stationary equilibria of a de- terministic, pure exchange, two-period overlapping generations model with habit persistence. We show that preferences with multiplicative habits can lead to quite different equilibrium outcomes compared to subtractive ones. The two most commonly adopted habit specifications can differ in terms of homotheticity, gross substitutability, and uniqueness of equilibria. We illustrate these differences in terms of steady state equilibria, as well as local dynamics.

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File URL: http://moya.bus.miami.edu/~pgomis/SHMH_BOSSI.pdf
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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0605.

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Length: 16 pages
Date of creation: 10 May 2005
Date of revision: 27 Apr 2007
Publication status: Forthcoming: Under Review
Handle: RePEc:mia:wpaper:0605

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Keywords: Multiplicative and subtractive habit persistence; multiple equilibria; equilibrium dynamics;

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References

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  1. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
  2. Amartya Lahiri & Mikko Puhakka, 1996. "Habit Persistence in Overlapping Generations Economies Under Pure Exchange," UCLA Economics Working Papers 754, UCLA Department of Economics.
  3. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
  4. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  5. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, vol. 49(6), pages 1665-1691, August.
  6. Bunzel, Helle, 2006. "Habit persistence, money, and overlapping generations," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2425-2445, December.
  7. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  8. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  9. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
  10. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 01-90, Wharton School Rodney L. White Center for Financial Research.
  11. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  12. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  13. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  14. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
  15. Fernando Perera-Tallo & Hideo Konishi, 1997. "Existence of steady - state equium in an overlapping-generations model with production (*)," Economic Theory, Springer, vol. 9(3), pages 529-537.
  16. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151.
  17. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers 0708, University of Miami, Department of Economics.
  18. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  19. Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
  20. Boldrin, Michele & Woodford, Michael, 1990. "Equilibrium models displaying endogenous fluctuations and chaos : A survey," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 189-222, March.
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Citations

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Cited by:
  1. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting equilibria through cycles in an overlapping generations model of money," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 515-526, June.
  2. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, January.
  3. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers 0708, University of Miami, Department of Economics.
  4. Orrego, Fabrizio, 2011. "Habit formation and sunspots in overlapping generations models," Working Papers 2011-013, Banco Central de Reserva del Perú.

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