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Consumption Externalities and Equilibrium Dynamics with Heterogenous Agents

  • Kazuo Mino

    ()

    (Kyoto University)

  • Yasuhiro Nakamoto

    ()

    (Kyusyu Sangyo University)

This paper explores the effect of consumption externalities on equilibrium dynamics of a standard neoclassical growth model in which there are two types of agents. To emphasize the presence of heterogenous agents, we distinguish intergroup consumption externalities from intragroup consumption externalities. We show that if there are intragroup consumption externalities alone, then the steady state equilibrium satisfies saddle-point stability and the equilibrium path of the economy is uniquely determined. In contrast, even if the intragroup consumption externalities do not exist, the intergroup external effects of consumption may yield either unstability or local indeterminacy of the steady-state equilibrium. In addition to analytical considerations, we show the relationship between the stability and the consumption externalities in numerical examples.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP792.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 792.

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Length: 29pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:kyo:wpaper:792
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  1. Chen, Been-Lon & Hsu, Mei, 2007. "Admiration is a source of indeterminacy," Economics Letters, Elsevier, vol. 95(1), pages 96-103, April.
  2. Sarte, Pierre-Daniel G., 1997. "Progressive taxation and income inequality in dynamic competitive equilibrium," Journal of Public Economics, Elsevier, vol. 66(1), pages 145-171, October.
  3. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
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  5. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2005. "Can consumption spillovers be a source of equilibrium indeterminacy?," 2005 Meeting Papers 362, Society for Economic Dynamics.
  6. Garriga, Carlos, 2006. "Overconsumption, reference groups, and equilibrium efficiency," Economics Letters, Elsevier, vol. 91(3), pages 420-424, June.
  7. Kazuo Mino, 2008. "Growth And Bubbles With Consumption Externalities," The Japanese Economic Review, Japanese Economic Association, vol. 59(1), pages 33-53.
  8. Sorger, Gerhard, 2002. "On the Long-Run Distribution of Capital in the Ramsey Model," Journal of Economic Theory, Elsevier, vol. 105(1), pages 226-243, July.
  9. Mark Weder, 2000. "Consumption Externalities, Production Externalities and Indeterminacy," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 435-453, November.
  10. Jang-Ting Guo & Kevin J. Lansing, 1997. "Indeterminacy and stabilization policy," Working Paper 9708, Federal Reserve Bank of Cleveland.
  11. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  12. Liu, Wen-Fang & Turnovsky, Stephen J., 2005. "Consumption externalities, production externalities, and long-run macroeconomic efficiency," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 1097-1129, June.
  13. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 1-8, February.
  14. Christian Gollier, 2004. "Misery Loves Company: Equilibrium Portfolios With Heterogeneous Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1169-1192, November.
  15. Li Wenli & Pierre -Daniel Sarte, 2004. "Progressive Taxation and Long-Run Growth," American Economic Review, American Economic Association, vol. 94(5), pages 1705-1716, December.
  16. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
  17. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
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