Habit Formation, Catching Up with the Joneses, and Economic Growth
AbstractOur objective is to investigate how alternative assumptions about preferences affect the process of economic growth. To do this, we analyze a neoclassical growth model under three alternative preference specifications: (i) time separable, (ii) catching up with the Joneses, and (iii) habit formation. Departing from the time separable specification leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change.
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Bibliographic InfoPaper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2004-09-P.
Date of creation: Jan 2004
Date of revision: Jan 2004
Publication status: Published in Journal of Economic Growth, Volume 9, 2004, 47-80
Other versions of this item:
- Francisco Alvarez-Cuadrado & Goncalo Monteiro & Stephen J. Turnovsky, 2004. "Habit Formation, Catching Up with the Joneses, and Economic Growth," Journal of Economic Growth, Springer, vol. 9(1), pages 47-80, 03.
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