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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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Related research

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

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References

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  1. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 981-92, July.
  2. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  3. Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics, EconWPA 0507005, EconWPA.
  4. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
  5. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  6. Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
  7. 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.
  8. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  9. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  10. Jaime Alonso-Carrera & Jordi Caball?Author-Email: jordi.caballe@uab.es & Xavier Raurich, . "Growth, Habit Formation, and Catching-up\ with the Joneses," UFAE and IAE Working Papers 497.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  11. Bunzel, Helle, 2006. "Habit Persistence, Money, and Overlapping Generations," Staff General Research Papers 12405, Iowa State University, Department of Economics.
  12. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, 9.
  13. Amartya Lahiri & Mikko Puhakka, 1996. "Habit Persistence in Overlapping Generations Economies Under Pure Exchange," UCLA Economics Working Papers 754, UCLA Department of Economics.
  14. 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.
  15. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
  16. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, Econometric Society, vol. 53(5), pages 995-1045, September.
  17. Christopher D Carroll, 2000. "Solving Consumption Models with Multiplicative Habits," Economics Working Paper Archive 421, The Johns Hopkins University,Department of Economics.
  18. 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.
  19. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 193-227, April.
  20. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers, University of Miami, Department of Economics 0708, University of Miami, Department of Economics.
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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," Staff General Research Papers 32099, Iowa State University, Department of Economics.
  2. Orrego, Fabrizio, 2011. "Habit formation and sunspots in overlapping generations models," Working Papers, Banco Central de Reserva del Perú 2011-013, Banco Central de Reserva del Perú.
  3. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers, University of Miami, Department of Economics 0708, University of Miami, Department of Economics.
  4. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 10(1), pages 1-32, January.

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