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Habits and Endogenous Investment Fluctuations

  • Been-Lon Chen

    (Institute of Economics, Academia Sinica)

  • Yu-Shan Hsu

    (Department of Economics, National Chung Cheng University)

  • Kazuo Mino

    (Institute of Economic Research, Kyoto University)

This paper envisages whether an external habit effect can produce indeterminate equilibrium paths thereby generating endogenous investment fluctuations. In an otherwise standard optimal growth model with leisure, we find that an external habit effect can cause endogenous investment fluctuations if there is a proper habit effect together with a proper intertemporal elasticity of substitution. In a calibrated version of the model, we find that endogenous investment fluctuations are plausible when the habit effect is negative with the "catching up with the Joneses"effect.

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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 730.

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Length: 22pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:kyo:wpaper:730
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