Multiple Equilibria in a Growth Model with Habit Persistence
AbstractThis paper uses an otherwise standard, competitive growth model without externality and distortions to establish multiple balanced growth paths. Our model is based on the standard one-sector, endogenous growth model of Romer (1986), with a twist that households’ preference depends partly upon how his/her consumption compares to a habit stock formed by his/her own past consumption. This model establishes multiple equilibria because habit persistence in preference induces an intertemporal complementarity effect among consumption flows, with current consumption reinforcing future consumption. As a result, there exist two balanced-growth paths, with one path exhibiting low consumption and habits and high economic growth, and the other exhibiting high consumption and habits and low growth, and thus a development trap. Both steady states are saddle points, but an initial condition cannot pin down the steady state to which an economy converges. Both steady states cannot be pareto-ranked because of no market failure.
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Bibliographic InfoPaper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 04-A015.
Length: 30 pages
Date of creation: Nov 2004
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Web page: http://www.econ.sinica.edu.tw/index.php?foreLang=en
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habit persistence; multiple equilibria;
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- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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