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Anticipated Consumption and its Impact on Capital Accumulation and Growth: 'Forward-Looking' vs. 'Backward-Looking' Consumption Reference

  • Goncalo Monteiro
  • Stephen Turnovsky

It has long been argued that the anticipations of some future event will impact current consumption and well-being in advance of the occurrence of the event itself. This paper introduces this idea of anticipated pleasure into the Ramsey growth model, by assuming that in addition to his own current consumption, an agent’s current utility depends upon a reference consumption level that is based on expected future consumption. Two alternative specifications of the anticipated future consumption levels are considered: an external index and an internal index. We analyze the macrodynamic equilibrium, comparing it to both the standard Ramsey model, and the more familiar parallel model of habit formation. We establish a number of theoretical propositions characterizing the impact of the anticipated consumption reference on the transitional dynamics and long-run equilibrium, supplementing these with extensive numerical simulations.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4536.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4536
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  1. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
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  4. Stephen Turnovsky & Goncalo Monteiro, 2006. "Consumption Externalities, Production Externalities, and Efficient Capital Accumulation under Time Non-Separable Preferences," Working Papers UWEC-2006-26-P, University of Washington, Department of Economics.
  5. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
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  7. Gali, J., 1992. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice and Asset Prices," Papers 92-22, Columbia - Graduate School of Business.
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  12. Francisco Alvarez & Goncalo Monteiro, 2003. "Habit Formation, Catching up with the Joneses, and Non-Scale Growth," Computing in Economics and Finance 2003 289, Society for Computational Economics.
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  14. Jaime Alonso-Carrera & Jordi Caball?Author-Email: jordi.caballe@uab.es & Xavier Raurich, . "Growth, Habit Formation, and Catching-up\ with the Joneses," UFAE and IAE Working Papers 497.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  16. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
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  26. repec:mcb:jmoncb:v:45:y:2013:i::p:423-447 is not listed on IDEAS
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  29. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
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