Happiness due to Consumption and its Increases, Wealth and Status

This paper departs from the standard open-economy Ramsey model and introduces additional concerns for wealth, status and Easterlin's (2001) hypothesis that consumption changes, in particular increases, are important and not only the level. These extensions induce first of all interior steady states, which are lacking in the standard model, multiple steady states (separated by thresholds leading to history dependence) and limit cycles. The existence of cyclical consumption patterns could provide a so far ignored source for real business cycles. Surprisingly, introducing status conferred by private wealth or conspicuous consumption has no effect despite the involved externalities (the outcomes are observationally equivalent) as long as the social influence associated with the status externalities remains moderate.