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Optimal growth when tastes are inherited

  • de la Croix, David

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

  • Michel, Philippe

    (Université de la Méditerranée, IUF; GREQAM, Marseille)

We address the issue of optimal growth when standard-of-living aspirations are transmitted from one generation to the next. We derive the condition for the optimal solution to be stable in the saddle-point sense and show that this optimal solution may display damped oscillations even when the planner does not discount the utility of future generations (golden rule case). The decentralization of the optimal solution aims at correcting the inter-generational externality by use of an investment subsidy and allows to avoid socially damaging rushes on consumption in expansion periods. It also allows to stabilize output in the case of competitive economies displaying endogenous fluctuations.

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File URL: http://sites.uclouvain.be/econ/DP/IRES/9712.pdf
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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1997012.

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Length: 16
Date of creation: 01 Mar 1997
Date of revision: 00 Jun 1997
Handle: RePEc:ctl:louvir:1997012
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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
  3. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  4. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  5. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
  6. Gary S. Becker, 1991. "Habits, Addictions, and Traditions," University of Chicago - George G. Stigler Center for Study of Economy and State 71, Chicago - Center for Study of Economy and State.
  7. Boucekkine, Raouf, 1995. "An alternative methodology for solving nonlinear forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 711-734, May.
  8. Philippe Michel & Alain Venditti, 1997. "Optimal growth and cycles in overlapping generations models (*)," Economic Theory, Springer, vol. 9(3), pages 511-528.
  9. Pashardes, Panos, 1986. "Myopic and Forward Looking Behavior in a Dynamic Demand System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 387-97, June.
  10. de la Croix, David, 1996. "The Dynamics of Bequeathed Tastes," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  11. Clark, Andrew E. & Oswald, Andrew J. & Warr, Peter B., 1994. "Is job satisfaction u-shaped in age ?," CEPREMAP Working Papers (Couverture Orange) 9407, CEPREMAP.
  12. Becker, Gary S, 1974. "A Theory of Social Interactions," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1063-93, Nov.-Dec..
  13. Ryder, Harl E, Jr & Heal, Geoffrey M, 1973. "Optimum Growth with Intertemporally Dependent Preferences," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 1-33, January.
  14. Farmer, Roger E. A., 1986. "Deficits and cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 77-88, October.
  15. Levhari, David & Liviatan, Nissan, 1972. "On stability in the saddle-point sense," Journal of Economic Theory, Elsevier, vol. 4(1), pages 88-93, February.
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