Keeping up with the ageing Joneses

Abstract

In this paper we consider the implications of relative consumption externalities in the Blanchard-Yaari overlapping generations framework. Unlike most of the macroeconomic literature that studies this question, the differences between agents, and, thus, in their relative position, persist in equilibrium. We show in our fixed employment model that consumption externalities lower consumption and the capital stock in long-run equilibrium, a result in sharp contrast to the recent findings of Liu and Turnovsky (2005). In addition, we solve for the intertemporal path of the economy to investigate its response to demographic shocks, specifically, to permanent changes in the birth and death rates.JEL Codes: D91, E21

Growth, Pensions, and the Aging Joneses

“…Following Fisher and Heijdra (2009), for a consumer born at time v (v ≤ t), lifetime utility at t equals…”

“…One distinction is that here adjustment takes place instantly, whereas the Fisher and Heijdra (2009) findings feature an initial increase in consumption, followed by a continuous decline in its level, accompanied by a reduction in the capital stock. Another distinction is that in Fisher and Heijdra (2009) the real interest rises due to the steady-state decline in the physical capital stock, which leads to a "steepening" of the consumption time profile of preshock generations. In contrast, the real interest is fixed in this model and these cohort effects do not take place.…”

“…Another important property of the BY framework, as recently shown by Fisher and Heijdra (2009) in an exogenous growth setting, is that the importance of demographic turnover also depends on agents' preferences, and specifically on their attitude to status. This allows us to ask whether or not status competition is an engine of economic growth.…”

“…A framework in which differences among individuals persist over time is, we believe, a promising avenue for exploring the macroeconomic implications of status competition. Another important task in this paper, then, is to extend the findings of Fisher and Heijdra (2009) to the endogenous growth context. 4 Among our results, we show that the balanced growth rate, due to intergenerational turnover in financial wealth, is lower in the BY framework than on its RA counterpart.…”

Deviant generations, Ricardian equivalence, and growth cycles

“…In addition to describing the equilibrium growth paths for economies where the nonnegativity constraint on bequests either binds or does not bind at each date, eqs. (18) and 20) also describe the relationship between consumption allocations between any two consecutive dates assuming the current generation chooses the same course of action -as it applies to bequests -as their parents. However, a priori there is no reason to believe that an economy cannot support alternative equilibrium paths, ones where any one particular generation does not leave a bequest even though their predecessors did, nor do their progeny feel they must follow in the same footsteps (bequest-wise) as their parents.…”