Multiple BGPs in a Growth Model with Habit Persistence

Authors


  • The author would like to thank Jang-Ting Guo for bringing the research topic to his attention and suggestions. He also thanks the referee, Neville Jiang, Kazuo Mino, Koji Shimomura, seminar, and conference participants at Academia Sinica, Kobe University, National Taiwan University, the S.C. Tsiang Memorial Meeting (Taipei), the ASSA Meeting (Philadelphia), and, in particular, Ping Wang for very helpful and constructive suggestions. All errors and omissions are the author's responsibility.

Abstract

This paper establishes multiple balanced growth paths in an otherwise standard, competitive growth model without externality or distortions and with households' preference dependent upon how his/her consumption compares to a habit stock formed by his/her own past consumption. The key feature in our model is that consumption forms habits in combination with existing habits. This model establishes multiple equilibria because habit persistence induces an internal, intertemporal complementarity effect among consumption flows, with current consumption reinforcing future consumption. As a result, there exist two balanced-growth paths, with one path exhibiting low consumption and habits and high economic growth, and the other path exhibiting high consumption and habits and low growth that is not necessarily a development trap. Both steady states are saddles, but global indeterminacy arises where a high balanced growth path co-exists with a low balanced growth path where the two equilibrium paths cannot be pareto ranked and history need not matter for the selection of the equilibrium path.

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