Indeterminacy with preferences featuring multiplicative habits in consumption

Vasilev, Aleksandar (2021) Indeterminacy with preferences featuring multiplicative habits in consumption. Journal of Economics and Econometrics, 64 (3). pp. 1-16. ISSN 2032-9652

Full content URL: https://ideas.repec.org/a/eei/journl/v64y2021i3p1-...

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Indeterminacy with preferences featuring multiplicative habits in consumption
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Abstract

We introduce consumption habits into an exogenous growth model augmented with a detailed government sector, and calibrate the model to Bulgarian data for the period following the introduction of the currency board arrangement (1999-2016). We show that in contrast to the case without habits, e.g., Vasilev (2009), when the economy features saddle-path stability, the habit motive alone leads to equilibrium indeterminacy in the model. When habits enter multiplicatively in the representative agent's utility function, the setup exhibits "sink" dynamics, and equilibrium paths are determined by "animal spirits." These results are in line with the findings in the literature, e.g., Benhabib and Farmer (1994, 1996) and Farmer (1999), and have major implications for polcy-making and welfare.

Keywords:Equilibrium indeterminacy, animal spirits, multiplicative consumption habits, Bulgaria
Subjects:L Social studies > L130 Macroeconomics
Divisions:Lincoln International Business School
ID Code:46885
Deposited On:15 Dec 2021 14:02

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