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Been-lon Chen and Yu-shan Hsu
''Is admiration a source of indeterminacy when the speed of habit formation is finite?''
( 2009, Vol. 29 No.4 )
In an economy where the time preference rate is sufficiently decreasing in individual consumption, Chen and Hsu (2007) find that a consumption admiration effect can be a source of local indeterminacy, whereby average consumption flows exert a positive external effect on an individual's utility. In our paper, average consumption habits externally increase an individual's utility. The increase in average consumption habits is the difference between average consumption flows and existing average consumption habits adjusted for by the speed of the consumption habit formation. The model in Chen and Hsu (2007) is a special case that emerges only when the speed of habit formation is infinite. In our general model, an admiration effect is no longer a source of equilibrium indeterminacy unless the speed of consumption habit formation is infinite.
Keywords: Neoclassical growth model, consumption habit externalities, indeterminacy
JEL: O4 - Economic Growth and Aggregate Productivity: General
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
Manuscript Received : Sep 09 2009 Manuscript Accepted : Dec 06 2009

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