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Luxury Consumption, Precautionary Savings and Wealth Inequality

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  • Claudio Campanale

Abstract

Most macroeconomic models are based on the assumption of a single homogeneous consumption good. In the present paper we consider a model with two goods: A basic good and a luxury good. We then apply this assumption to a standard general equi- librium heterogeneous agent model. We ¯nd a substantial reduction in precautionary savings compared to a standard model. The e®ect on wealth inequality turns out to be ambiguous and to depend on the size of the assumed earnings risk.

Suggested Citation

  • Claudio Campanale, 2015. "Luxury Consumption, Precautionary Savings and Wealth Inequality," Carlo Alberto Notebooks 423, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:423
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    References listed on IDEAS

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    1. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
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    8. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
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    14. Shinsuke Ikeda, 2006. "Luxury And Wealth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 495-526, May.
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    20. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
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    Cited by:

    1. Hyun Jin Jang & Zuo Quan Xu & Harry Zheng, 2020. "Optimal Investment, Heterogeneous Consumption and Best Time for Retirement," Papers 2008.00392, arXiv.org, revised Jun 2022.

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    More about this item

    Keywords

    precautionary savings; wealth inequality; luxury consumption; non-homothetic utility;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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