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Journal of Economic Growth

, Volume 9, Issue 1, pp 47–80 | Cite as

Habit Formation, Catching Up with the Joneses, and Economic Growth

  • Francisco Alvarez-Cuadrado
  • Goncalo Monteiro
  • Stephen J. Turnovsky
Article

Abstract

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.

habit formation consumption externalities economic growth 

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Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Francisco Alvarez-Cuadrado
    • 1
  • Goncalo Monteiro
    • 1
  • Stephen J. Turnovsky
    • 1
  1. 1.Department of EconomicsUniversity of WashingtonSeattleUSA

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