Abstract
We study the growth process among a large group of economies where consumption relative to a reference group determines the discount factor of the household agents. We characterize all possible balanced growth paths and their stability properties. The model can explain why two economies having similar production technologies, preferences, and total factor productivity growth rates can differ in labor supply behavior and have diverging growth paths depending on their initial conditions. Numerical analysis of the model suggests that growth path divergence is plausible based on cross‐country differences in savings rates. History dependence on time preference also generates realistic transitional dynamics.
| Original language | English |
|---|---|
| Pages (from-to) | 489-525 |
| Number of pages | 37 |
| Journal | International Journal of Economic Theory |
| Volume | 19 |
| Issue number | 3 |
| Early online date | 11 Nov 2022 |
| DOIs | |
| Publication status | Published - Sept 2023 |
Bibliographical note
Funding Information:We thank Xiaodong Fan, Ben Heijdra, Lutz Hendricks, Fedor Ishakov, Robert Kollmann, Kishor Sharma, and seminar participants at Australian National University for several helpful comments and discussions. We are also thankful to an anonymous referee for making several helpful suggestions. Open access publishing facilitated by Charles Darwin University, as part of the Wiley - Charles Darwin University agreement via the Council of Australian University Librarians.
Publisher Copyright:
© 2022 The Authors. International Journal of Economic Theory published by John Wiley & Sons Australia, Ltd on behalf of International Association for Economic Theory.
