Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-24T03:07:42.910Z Has data issue: false hasContentIssue false
  • English
  • Français

CONSEQUENCES OF MODELING HABIT PERSISTENCE

Published online by Cambridge University Press:  01 June 2009

Luca Bossi  and
Pere Gomis-Porqueras
Luca Bossi*
Affiliation:
University of Miami
Pere Gomis-Porqueras
Affiliation:
University of Miami
*
Address correspondence to: Luca Bossi, Department of Economics, University of Miami, P.O. Box 248126, Coral Gables, FL 33124-6550, USA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we study the stationary and non-stationary equilibria of a deterministic, pure exchange, two-period overlapping generations model with habit persistence. We show that preferences with multiplicative habits can lead to quite different equilibrium outcomes compared to subtractive ones. The two most commonly adopted habit specifications can differ in terms of homotheticity, gross substitutability, and uniqueness of equilibria. We illustrate these differences in terms of steady-state equilibria, as well as local dynamics.

Keywords

Multiplicative and Subtractive Habit PersistenceMultiple EquilibriaEquilibrium Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 349 - 365
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abel, Andrew (1990) Asset prices under habit formation and catching up with the Joneses. American Economic Review 80, 38–42.Google Scholar
Alonso-Carrera, Jaime, Caballé, Jordí, and Raurich, Xavier (2005) Growth, habit formation, and catching-up with the Joneses. European Economic Review 49, 1665–1691.CrossRefGoogle Scholar
Banks, James, Blundell, Richard, and Lewbel, Arthur (1997) Quadratic Engel curves and consumer demand. The Review of Economics and Statistics 79 (4), 527–539.Google Scholar
Boldrin, Michele and Woodford, Michael (1990) Equilibrium models displaying endogenous fluctuations and chaos: A survey. Journal of Monetary Economics 25, 189–222.CrossRefGoogle Scholar
Bossi, Luca, Gomis-Porqueras, Pere, and Kelly, David K. (2007) Optimal Second Best Taxation of Addictive Good. Mimeo, University of Miami.Google Scholar
Bunzel, Helle (2006) Habit persistence, money, and overlapping generations. Journal of Economics Dynamics and Control 30 (12), 2425–2445.Google Scholar
Campbell, John and Cochrane, John H. (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205–251.CrossRefGoogle Scholar
Carroll, Christopher (2000) Solving consumption models with multiplicative habits. Economic Letters, 68, 67–77.CrossRefGoogle Scholar
Carroll, Christopher and Kimball, Miles S. (1996) On the concavity of the consumption function. Econometrica 64, 981–992.CrossRefGoogle Scholar
Carroll, Christopher, Overland, Jody, and Weil, David (2000) Saving and growth with habit formation. American Economic Review 90, 341–355.CrossRefGoogle Scholar
Cass, David and Shell, Karl (1983) Do “sunspots” matter? Journal of Political Economy 91, 193–227.CrossRefGoogle Scholar
Chen, Xiaohong and Ludvigson, Sydney C. (2006) Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Models. Mimeo, New York University.Google Scholar
Constantinides, George M. (1990) Habit formation: A resolution of the equity premium puzzle. Journal of Political Economy 98, 519–543.CrossRefGoogle Scholar
de la Croix, David and Michel, Philippe (2002) A Theory of Economic Growth, Dynamics, and Policy in Overlapping Generations. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Gale, David (1973) Pure exchange equilibrium of dynamic economics models. Journal of Economic Theory 6, 12–36.CrossRefGoogle Scholar
Gourinchas, Pierre O. and Parker, Jonathan A. (2002) Consumption over the life cycle. Econometrica 70 (1), 47–89.CrossRefGoogle Scholar
Grandmont, Jean M. (1985) On endogenous competitive business cycles. Econometrica 53 (5), 995–1046.CrossRefGoogle Scholar
Guvenen, Fatih (2006) Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective. Journal of Monetary Economics 53 (7), 1451–1472.CrossRefGoogle Scholar
Ingersoll, Jonathan E. (1987) Theory of Financial Decision Making. Savage, MD: Rowman and Littlefield Publishers.Google Scholar
Konishi, Hideo and Perera-Tallo, Fernando (1997) Existence of steady-state equilibrium in an overlapping-generations model with production. Economic Theory 9, 529–537.Google Scholar
Lahiri, Amartya and Puhakka, Mikko (1998) Habit persistence in overlapping generations economies under pure exchange. Journal of Economic Theory 78, 176–186.Google Scholar
Wendner, Ronald (2003) Do habits raise consumption growth? Research in Economics 57, 151–163.CrossRefGoogle Scholar