Habit Formation, Catching Up with the Joneses, and Economic Growth
Our objective is to investigate how alternative assumptions about preferences affect the process of economic growth. To do this, we analyze a neoclassical growth model under three alternative preference specifications: (i) time separable, (ii) catching up with the Joneses, and (iii) habit formation. Departing from the time separable specification leads to important differences in the dynamic structure, the adjustment path followed by key economic variables, the correlation patterns implied by the time series generated by the model, and the speed of convergence to the new steady state. In the catching up with the Joneses economy the differences arise from a consumption externality, while in the habit formation economy the difference arises from the fact that agents not only smooth consumption but also its rate of change.
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|Date of creation:||Jan 2004|
|Date of revision:||Jan 2004|
|Publication status:||Published in Journal of Economic Growth, Volume 9, 2004, 47-80|
|Contact details of provider:|| Postal: Box 353330, Seattle, WA 98193-3330|
Web page: http://www.econ.washington.edu/
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