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

their endogenous growth models, which assume that agents compare current consumption
to some measure of past consumption history, or “habits.”³

The modelling framework in which we conduct this exercise is otherwise standard. It
is in the general category of the neoclassical Ramsey framework that assumes infinitely-
lived consumer-producers. We consider both closed and small open economy models in this
study. Moreover, in our closed economy setting, similar to that employed by Fisher and Hof
(2000b), we analyze the implications of a status preference for durable consumption in both
endogenous and fixed employment specifications. In considering implications of changes in
agents attitudes toward relative social position, we also employ a specific parameterization
of instantaneous preferences used by Rauscher (1997b), among others.

The small open economy framework we develop is based on the specifications of Bhan-
dari, et. al. (1990), Fisher (1995), and Fisher and Terrell (2000). These specifications
assume an otherwise “small” open economies that cannot freely borrow or lend at the
prevailing world interest rate. Rather, they are subject to an upward-sloping interest rate
relationship that implies that the interest rate the country can borrow from the interna-
tional capital market rises with the level of national indebtedness. Among the advantages
of this framework, it generates, as in the closed economy cases, a fourth-order differential
equation system that possesses a saddlepoint, which facilitates comparisons between the
closed and open economies.

Among our principle results, we derive the intertemporal equilibria of the closed and
open economies, including their dynamics, show that they are all of a fourth order, and
establish that the corresponding steady states are saddlepoints. In terms of the closed
economy model we consider particular two issues: i) the effect of an increase in the degree
of status preference on the steady-state equilibrium with endogenous employment and ii)
the implications in the special case of fixed employment of increase in the importance
of relative social position on speeds of intertemporal adjustment.⁴ Regarding the first
question, we find that an increase in the degree of status preference raises the long-run
levels of durable consumption, its corresponding stock, employment, and the physical

³Mansoorian (1998, 2000) also incorporates habits (of durable consumption) in his work.

⁴Since the Jacobian matrices of these models have two negative eigenvalues, they possess two distinct
“speeds” of stable transitional adjustment.

<<   1   2   3   4   5   6   >>

More intriguing information