Habits and Endogenous Investment Fluctuations

Been-Lon Chen, Yu-Shan Hsu and Kazuo Mino
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Yu-Shan Hsu: Department of Economics, National Chung Cheng University

No 730, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper envisages whether an external habit effect can produce indeterminate equilibrium paths thereby generating endogenous investment fluctuations. In an otherwise standard optimal growth model with leisure, we find that an external habit effect can cause endogenous investment fluctuations if there is a proper habit effect together with a proper intertemporal elasticity of substitution. In a calibrated version of the model, we find that endogenous investment fluctuations are plausible when the habit effect is negative with the "catching up with the Joneses"effect.

Keywords: catching up with the Joneses; habit; indeterminacy; one-sector growth model (search for similar items in EconPapers)
JEL-codes: E21 E32 (search for similar items in EconPapers)
Pages: 22pages
Date: 2010-10
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:730

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