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Can consumption habit spillovers be a source of equilibrium indeterminacy?

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  • Been-Lon Chen

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  • Yu-Shan Hsu

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  • Kazuo Mino

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Abstract

This paper investigates whether the external consumption habit can be a source of indeterminacy in a one-sector growth model when the labor supply is elastic. When there is a proper habit effect with a positive intertemporal elasticity of substitution, we find that the model exhibits indeterminacy if the coefficient of the habit formation is sufficiently large that allows for a substantial impact of current consumption on the habit. Indeterminacy arises even though the elasticity of the Frisch labor supply is positive and the elasticity of the labor demand in negative. In a calibrated version, we find that indeterminacy is empirically plausible when the habit effect is negative that features the “catching up with the Joneses” effect. Under given “catching up with the Joneses” effects, the external consumption habit can be a source of indeterminacy even if more than a half of the external consumption habit comes from past average consumption. Copyright Springer-Verlag 2013

Suggested Citation

  • Been-Lon Chen & Yu-Shan Hsu & Kazuo Mino, 2013. "Can consumption habit spillovers be a source of equilibrium indeterminacy?," Journal of Economics, Springer, vol. 109(3), pages 245-269, July.
  • Handle: RePEc:kap:jeczfn:v:109:y:2013:i:3:p:245-269
    DOI: 10.1007/s00712-012-0301-9
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    References listed on IDEAS

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    Cited by:

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    2. Gómez, Manuel A. & Monteiro, Goncalo, 2015. "Internal habits in an endogenous growth model with elastic labor supply," Economic Modelling, Elsevier, vol. 51(C), pages 583-595.
    3. Kazuo MIno & Yasuhiro Nakamoto, 2014. "Conformism and Wealth Distribution," KIER Working Papers 901, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    Habit; Catching up with the Joneses; Indeterminacy; Growth model; E21; E32;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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