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CONSEQUENCES OF MODELING HABIT PERSISTENCE

Published online by Cambridge University Press:  01 June 2009

Luca Bossi  and
Pere Gomis-Porqueras
Luca Bossi*
Affiliation:
University of Miami
Pere Gomis-Porqueras
Affiliation:
University of Miami
*
Address correspondence to: Luca Bossi, Department of Economics, University of Miami, P.O. Box 248126, Coral Gables, FL 33124-6550, USA; e-mail: l.bossi@miami.edu.
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Abstract

In this paper, we study the stationary and non-stationary equilibria of a deterministic, pure exchange, two-period overlapping generations model with habit persistence. We show that preferences with multiplicative habits can lead to quite different equilibrium outcomes compared to subtractive ones. The two most commonly adopted habit specifications can differ in terms of homotheticity, gross substitutability, and uniqueness of equilibria. We illustrate these differences in terms of steady-state equilibria, as well as local dynamics.

Keywords

Multiplicative and Subtractive Habit PersistenceMultiple EquilibriaEquilibrium Dynamics

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 349 - 365
Copyright
Copyright © Cambridge University Press 2009

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