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Indeterminacy with preferences featuring multiplicative habits in consumption: lessons from Bulgaria (1999-2016)

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  • Vasilev, Aleksandar

Abstract

We introduce consumption habits into an exogenous growth model augmented with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without habits, e.g., Vasilev (2009), when the economy features saddle-path stability, the habit motive alone leads to equilibrium indeterminacy in the model. When habits enter multiplicatively in the representative agent's utility function, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits." These results are in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for policy-making and welfare.

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  • Vasilev, Aleksandar, 2018. "Indeterminacy with preferences featuring multiplicative habits in consumption: lessons from Bulgaria (1999-2016)," EconStor Preprints 182499, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:182499
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    References listed on IDEAS

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    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Vasilev, Aleksandar, 2015. "Welfare gains from the adoption of proportional taxation in a general-equilibrium model with a grey economy: the case of Bulgaria's 2008 flat tax reform," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 48(2), pages 169-185.
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    6. Vasilev, Aleksandar, 2009. "Business cycles in Bulgaria and the Baltic countries: an RBC approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(2), pages 148-170.
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    Keywords

    Equilibrium indeterminacy; animal spirits; multiplicative consumption habits; Bulgaria;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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