This paper examines the interrelations between the sectoral composition of government spending and macroeconomic (in)stability in a two‐sector real business cycle model with positive productive externalities in investment and a balanced‐budget fiscal policy rule, whereby endogenous public expenditures are financed by the distortionary constant tax rate. Under the benchmark parameterization, our model always exhibits indeterminacy and sunspots provided the tax rate does not exceed a critical value. When the tax rate is raised to a higher level, a sufficiently high public‐consumption share can destabilize the macroeconomy by generating belief‐driven cyclical fluctuations. We also find that saddle‐path stability and equilibrium uniqueness will prevail when the household's labor supply elasticity is not higher than a threshold level. In addition, analytical proofs for each of the aforementioned quantitative results are provided.
This paper explores the growth effects of both consumption- and wealth-induced social comparisons in a unified small open endogenous growth model. We analytically show that in an open economy not only do these two distinct status-seeking motives have very different growth effects, but these growth effects are also quite different from the conventional wisdom based on a closed economy. Status-seeking behavior need not favor economic growth. The asset portfolios of households and the imperfection of the international asset market both play an important role and jointly govern the growth effects of social status seeking. We also perform a quantitative experiment, showing that our analytical findings are robust and empirically plausible. Our analysis provides novel implications for social comparisons and new insights into the literature.
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