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Consumption Externalities and Equilibrium Dynamics with Heterogenous Agents

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  • Kazuo Mino

    ()
    (Graduate School of Economics, Osaka University)

  • Yasuhiro Nakamoto

    ()
    (Graduate School of Economics, Osaka University)

Abstract

This paper explores the effect of consumption externalities on equilibrium dynamics of a standard neoclassical growth model in which there are two types of agents. To emphasize the presence of heterogenous agents, we distinguish intergroup consumption externalities from intragroup consumption externalities. We show that if the intragroup externalities dominates the intrergroup external effects, then the steady state equilibrium satisfies saddle-point stability and the equilibrium path of the economy is uniquely determined. In contrast, if the intergroup external effects of consumption are strong enough, the steady-state equilibrium is either unstable or locally indeterminate. Based on the analytical as well as numerical considerations, we give intuitive implications of stability conditions.

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Bibliographic Info

Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 08-30.

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Length: 30 pages
Date of creation: Sep 2008
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Handle: RePEc:osk:wpaper:0830

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Keywords: Consumption externalities; Equilibrium determinacy; Heterogeneous agents; Progressive taxation;

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  1. Li Wenli & Pierre -Daniel Sarte, 2004. "Progressive Taxation and Long-Run Growth," American Economic Review, American Economic Association, vol. 94(5), pages 1705-1716, December.
  2. Alonso-Carrera, Jaime & Caballé, Jordi & Raurich, Xavier, 2008. "Can consumption spillovers be a source of equilibrium indeterminacy?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2883-2902, September.
  3. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
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  6. Kazuo Mino, 2007. "Growth and Bubbles with Consumption Externalities," Discussion Papers in Economics and Business 07-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  7. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
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  9. Christian Gollier, 2004. "Misery Loves Company: Equilibrium Portfolios With Heterogeneous Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1169-1192, November.
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  11. Chen, Been-Lon & Hsu, Mei, 2007. "Admiration is a source of indeterminacy," Economics Letters, Elsevier, vol. 95(1), pages 96-103, April.
  12. Sarte, Pierre-Daniel G., 1997. "Progressive taxation and income inequality in dynamic competitive equilibrium," Journal of Public Economics, Elsevier, vol. 66(1), pages 145-171, October.
  13. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  14. Garriga, Carlos, 2006. "Overconsumption, reference groups, and equilibrium efficiency," Economics Letters, Elsevier, vol. 91(3), pages 420-424, June.
  15. Sorger, Gerhard, 2002. "On the Long-Run Distribution of Capital in the Ramsey Model," Journal of Economic Theory, Elsevier, vol. 105(1), pages 226-243, July.
  16. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  17. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
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Cited by:
  1. Kazuo Mino & Yasuhiro Nakamoto, 2009. "Consumption Externalities and Wealth Distribution in a Neoclassical Growth Model," KIER Working Papers 683, Kyoto University, Institute of Economic Research.

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