DURABLE CONSUMPTION AS A STATUS GOOD: A STUDY OF NEOCLASSICAL CASES

debt n. Of course, the fact that the long-run stock of debt f is independent of the status
parameter η does not imply a lack of current account dynamics subsequent to an increase
in η. For example, it is straightforward to show, using the solution for f derived in the
appendix, that the current account, depending on the relative intertemporal dynamics of
durable consumption and output, initially improves (resp. deteriorates) before reaching
a time t = t*, such that f(t*) = 0. Afterwards, i.e., for t > t*, the current deteriorates
(resp. improves) as the stock of debt returns to its initial and steady-state level, fo = f,
as t → ∞.²⁴

4. Conclusions

In this paper we study the dynamic properties of neoclassical, representative agent models
of the consumer-producer in which status depends on relative consumption. Our extension
is to model in closed and open economy contexts relative consumption as a durable good.
Among our major results, we derive the optimizing equilibria of the closed and open
economies, including their dynamic properties, show that they are all of a fourth order, and
establish that the corresponding steady states in all cases possess the saddlepoint property.
Using a particular specihcation of relative consumption preferences, we investigate the
implications of changing the importance of status considerations. Among our results, we
hnd: i) an increase in the degree of status preference in the closed economy with endogenous
work effort raises the long-run levels of durable consumption, its corresponding stock,
employment, and physical capital; and ii) an increase in the status preference parameter
affects the stable speeds of adjustment in the special case of fixed employment, depending
on whether it raises or lowers the intertemporal elasticity of substitution. Finally, the
long-run implications of an increase in status considerations in the small open economy
model are generally similar to those in the closed economy.

²⁴The non-monotonic behavior of the current account reflects the fact that it depends on two stable
eigenvalues. Because n = no in response to a (permanent) increase in the status parameter η, the solution
of n simplifies because in (A15b), Q₂ = — Q₁. From the corresponding expression for n, we can show

,    ,*     ln(θ2∕θ1)

⇔ ^t = ^t = θι — θ2

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