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Internal vs. External Habit Formation in a Growing Economy with Overlapping Generations

  • Masako Ikefuji

    ()

    (Institute of School and Economic Research, Osaka University)

  • Kazuo Mino

    ()

    (Institute of Economic Research, Kyoto University)

This paper explores the roles of internal and external habit formation in a simple model of endogenous growth with overlapping generations. Unlike the representative agent settings in which the distinction between internal and external habits may not yield significant qualitative differences in working of the model economy, we show that the internal and external habit persistence in overlapping generations economies may have qualitatively different effects on the steady-state characterization as well as on the dynamic behavior of the economy. We also confirm that in an overlapping generations framework, whether the habits in the utility function takes subtractive or multiplicative forms may be critical both for long-run growth and for transitional dynamics.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP676.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 676.

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Length: 32pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:kyo:wpaper:676
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  1. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  2. Lahiri, Amartya & Puhakka, Mikko, 1998. "Habit Persistence in Overlapping Generations Economies under Pure Exchange," Journal of Economic Theory, Elsevier, vol. 78(1), pages 176-186, January.
  3. Ronald Wendner, 2002. "Capital Accumulation and Habit Formation," Economics Bulletin, AccessEcon, vol. 4(7), pages 1-10.
  4. repec:ebl:ecbull:v:4:y:2002:i:7:p:1-10 is not listed on IDEAS
  5. Uribe, Martin, 2002. "The price-consumption puzzle of currency pegs," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 533-569, April.
  6. Gómez, Manuel A., 2008. "Convergence speed in the Ak endogenous growth model with habit formation," Economics Letters, Elsevier, vol. 100(1), pages 16-21, July.
  7. Harbaugh, Richmond, 1996. "Falling behind the Joneses: relative consumption and the growth-savings paradox," Economics Letters, Elsevier, vol. 53(3), pages 297-304, December.
  8. Wendner, Ronald, 2003. "Do habits raise consumption growth?," Research in Economics, Elsevier, vol. 57(2), pages 151-163, June.
  9. Kazuo Mino, 2007. "Growth and Bubbles with Consumption Externalities," Discussion Papers in Economics and Business 07-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  10. Grishchenko, Olesya V., 2010. "Internal vs. external habit formation: The relative importance for asset pricing," Journal of Economics and Business, Elsevier, vol. 62(3), pages 176-194, May.
  11. Mino, Kazuo, 2006. "Consumption Externalities and Capital Accumulation in an Overlapping Generations Economy," MPRA Paper 17016, University Library of Munich, Germany.
  12. Hiraguchi, Ryoji, 2008. "The overlapping generations model with habit formation: A comment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 4016-4017, December.
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