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Is admiration a source of indeterminacy when the speed of habit formation is finite?

Author

Listed:
  • Been-lon Chen

    (Academia Sinica)

  • Yu-shan Hsu

    (National Chung Cheng University)

Abstract

In an economy where the time preference rate is sufficiently decreasing in individual consumption, Chen and Hsu (2007) find that a consumption admiration effect can be a source of local indeterminacy, whereby average consumption flows exert a positive external effect on an individual's utility. In our paper, average consumption habits externally increase an individual's utility. The increase in average consumption habits is the difference between average consumption flows and existing average consumption habits adjusted for by the speed of the consumption habit formation. The model in Chen and Hsu (2007) is a special case that emerges only when the speed of habit formation is infinite. In our general model, an admiration effect is no longer a source of equilibrium indeterminacy unless the speed of consumption habit formation is infinite.

Suggested Citation

  • Been-lon Chen & Yu-shan Hsu, 2009. "Is admiration a source of indeterminacy when the speed of habit formation is finite?," Economics Bulletin, AccessEcon, vol. 29(4), pages 3041-3049.
    • Handle: RePEc:ebl:ecbull:eb-09-00542
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    References listed on IDEAS

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    More about this item

    Keywords

    Neoclassical growth model; consumption habit externalities; indeterminacy;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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