Consumption Externalities, Heterogeneous Agents and Cycles
This paper studies the e¤ect of consumption externalities in a Ramsey model with heterogeneous agents and borrowing constraints. We consider two types of agents who di¤er in their initial wealth and discount factors. Further, we leave open the possibility of increase in consumption of one agent producing a positive (Keeping-Up with the Joneses) or a negative (Running-Away from the Joneses) effet over the marginal utility from own consumption of the other agent. We show that, at a steady-state equi- librium, inequality arises across agents which in turn implies that, agents have different consumption levels. Moreover, we show that, whenever the preferences display Keeping-Up with the Joneses feature, low elasticity of production factors substitution is no longer needed for the emergence of flip cycles and instability. Instead, only the external effects in consump- tion that plays a crucial role and promotes instability and the appearence of these endogeneous cycles.
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- Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2005. "Can consumption spillovers be a source of equilibrium indeterminacy?," UFAE and IAE Working Papers 657.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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- Jaime Alonso-Carrera & Jordi caballe & Xavier Raurich, 2007. "Can Consumption Spillovers Be A Source Of Equilibrium Indeterminacy?," CAMA Working Papers 2007-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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