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Multiple Equilibria in a Growth Model with Habit Persistence

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Abstract

This 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 Info

Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 04-A015.

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Length: 30 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:sin:wpaper:04-a015

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Keywords: habit persistence; multiple equilibria;

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