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Do habits generate endogenous fluctuations in a growing economy?

  • Park, Hyun
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    This article examines endogenous fluctuations under habit persistence in preferences using an otherwise standard one-sector endogenous growth model with fiscal government policies. I show that a continuum of competitive transitional equilibrium paths exists, in conjunction with a globally unique balanced growth path, when a household's preferences are characterized by habit persistence in a growing competitive economy with exogenous fiscal policies, namely, income taxes and productive public spending. Indeterminacy also emerges in the socially efficient second-best allocation even when the government intends to internalize habit externalities, including jealousy and admiration, by introducing optimal time-variant income taxes and public capital services. Therefore, in the presence of multiple competitive equilibria and socially efficient allocations and in the absence of continuous exogenous stochastic shocks, self-fulfilling beliefs drive endogenous business cycles in these growing economies.

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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 27 (2013)
    Issue (Month): C ()
    Pages: 54-68

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    Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:54-68
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