price stability in economies with habit persistence this paper shows that the divine coincidence does not hold in a sticky price model with external habit if a time varying tax rate on labor income is not implemented to fully eliminate the time varying distortions associated with external habit and monopoly power in goods market the required labor income tax rate is inversely related to the risk free real interest rate and the markup in the goods market but it is proportional to the degree of external habit under this circumstance the optimal monetary policy commands a countercyclical interest rate having a perfect negative correlation with tax rate in the sticky price model with external habit if a time invariant tax is the only fiscal instrument then the degree of external habit entails a gap between the private marginal rate of substitution between consumption and labor and the social marginal rate of substitution generating an endogenous trade off between the stabilization of welfare relevant output gap and inflation under this circumstance price stability is not the optimal policy the monetary policy authority should optimally try to undo the time varying distortions associated with external habit and monopoly power in goods market by deviating from price stability

why are taxes so high in egalitarian societies in an analysis of the relative income or relative consumption hypothesis it is shown that if the ratio of agent i s consumption to agent j s consumption enters into the utility function a tax on labor income may increase welfare for all agents if pretax wage inequality is low all agents will unanimously be in favor of such a tax thus there will be a tendency for taxes to be high in societies where pretax wage inequality is low copyright 1995 by the editors of the scandinavian journal of economics

price distortions in agriculture and their effects an international comparison the central thesis of this paper is that agricultural pricing policies pursued by developing countries produce effects which are diametrically opposite to those produced by the pricing policies of many developed countries and that the policies of both are costly in terms of global welfare in general the agricultural sector in developing countries is heavily taxed while that in the developed countries receives substantial price protection the effects of agricultural price distortions on output consumption trade and rural employment are estimated for nine countries in addition the effects of price distortions on the distribution of income between producers and consumers on government revenue and foreign exchange and the net social losses of the policies are calculated the results indicate that there are large income transfers and impacts on migration from the rural to the urban sector in developing countries and from the urban to the rural sector in developed economies

macroeconometric equivalence microeconomic dissonance and the design of monetary policy abstract macroeconometric equivalence means that estimates of dsge models using first order approximations to equilibrium conditions fail to distinguish between alternative preference technology configurations microeconomic dissonance means that the underlying microeconomic differences between ostensibly equivalent models become important when optimal monetary policy is derived the relevance of these concepts is established by analysis of optimal monetary policy using a small scale new keynesian model microeconomic and financial datasets are promising tools with which to overcome the equivalence dissonance problem

solving exchange rate puzzles with neither sticky prices nor trade costs we present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved the flexible price two country monetary model is extended to include a consumption externality with habit persistence habit persistence is modeled using campbell cochrane preferences with deep habits along the lines of the work of ravn schmitt grohe and uribe by deep habits we mean habits defined over goods rather than countries the model is simulated using the artificial economy methodology it offers a neo classical explanation of the meese rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting finally the model naturally generates the negative slope in the standard forward market regression

long run welfare under externalities in consumption leisure and production a case for happy degrowth vs unhappy growth in this paper we contribute to the debate on the relationship between growth and well being by examining an endogenous growth model where we allow for externalities in consumption leisure and production we analyze three regimes a decentralized economy where each household makes isolated choices without considering their external effects a planned economy where a myopic planner fails to recognize both leisure and consumption externalities but recognizes production externalities and a planned economy with a fully informed planner we first compare the balanced growth paths under the three regimes and then we numerically investigate the transition to the optimal balanced growth path we provide a number of findings first in a decentralized economy growth or labor or both are greater than in the regime with a fully informed planner and hence are sub optimal from a welfare standpoint second a myopic intervention which overlooks consumption and leisure externalities leads to more growth and labor than in both the decentralized and the fully informed regime third we provide a case for happy degrowth a transition to the optimal balanced growth path that is associated with downscaling of production a reduction in private consumption and an ongoing increase in leisure and well being

long run relationship between output capital labour and productivity in emerging market economies long run relationship between the variables involved in the production function is an issue that is important particularly in developing countries as the neoclassical production function is best suited for developed countries and its applicability to developing countries is questionable in various ways this motivates us to do this based on time series analysis taking indian textile industry as an example which is currently at its crucial stage as a critical industry in an emerging economy with the phasing out of multi fibre arrangement in 2005 this study documents existence of cointegration between capital and output negative impact of employment shocks on output changes substitutability between changes in capital and labour negative effect of shocks to changes in capital stock on productivity and negative effect of employment shocks on future productivity these results are in line with the general perceptions about this industry and with the standard neoclassical propositions as explained in t

growth habit formation and catching up with the joneses when habits are introduced multiplicatively in a capital accumulation model the consumers objective function might fail to be concave in this paper we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers problem we also characterize the equilibrium path of two growth models with multiplicative habits the internal habit formation model where individual habits coincide with own past consumption and the external habit formation or catching up with the joneses model where habits arise from the average past consumption in the economy we show that the introduction of external habits makes the equilibrium path inefficient during the transition towards the balanced growth path we characterize in this context the optimal tax policy

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

welfare implications of the interaction between habits and consumption externalities we analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an infficient dynamic equilibrium in particular we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes

tax evasion on a social network abstract we relate tax evasion behavior to a substantial literature on social comparison in judgements taxpayers engage in tax evasion as a means to boost their expected consumption relative to others in their social network the unique nash equilibrium of the model relates optimal evasion to a bonacich measure of network centrality more central taxpayers evade more given that tax authorities are now investing heavily in big data tools that aim to construct social networks we investigate the value of acquiring network information we do this using networks that allow for celebrity taxpayers whose consumption is seen widely and who are systematically of higher wealth we show that there are pronounced returns to the initial acquisition of network information especially in the presence of celebrity taxpayers

a two sector model of endogenous growth with leisure externalities abstract this paper considers the impact of leisure preference and leisure externalities on growth and labor supply in a lucas 1988 12 type model as in gomez 2008 7 with a separable non homothetic utility and the assumption that physical and human capital are both necessary inputs in both the goods and the education sectors in spite of the non concavities due to the leisure externality the balanced growth path is always unique which guarantees global stability for comparative static exercises we find that small differences in preferences toward leisure or in leisure externalities can generate substantial differences in hours worked and growth which may play a significant role in explaining differences in growth paths between the us and europe in addition to the mechanisms uncovered in prescott 2004 15 relying on differing marginal tax rates on labor income our model indicates however that a higher preference for leisure or leisure externality implies less growth but also less education attainment which seems counterfactual

trickle down consumption financial deregulation inequality and indebtedness over the last thirty years the u s experienced a surge in income inequality coupled with increasing levels of borrowing we model an olg economy populated by two types of household that care about how their consumption compares to that of their peers in this framework individual debt to income ratios decrease with income increases in consumption of rich households lead to increases in consumption of the rest and aggregate borrowing increases with income inequality we calibrate our model to evaluate the welfare implications of the process of nancial liberalization that began in the 1980s our analysis suggests that some of the nancial developments that lead to the recent expansion of credit may have decreased rather than increased welfare

the behaviour of the real exchange rate evidence from regression quantiles abstract we test for mean reversion in real exchange rates using a recently developed unit root test for non normal processes based on quantile autoregression inference in semi parametric and non parametric settings the quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate conditional on its past history and can detect asymmetric dynamic adjustment of the real exchange rate towards its long run equilibrium it therefore provides a detailed mapping of the real exchange rate behaviour while being a robust alternative to previous unit root tests the latter is confirmed by a simulation analysis comparing the power of the alternative tests as concerns the real exchange rate our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate with half lives less than one year in the extreme quantiles mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium however in the absence of shocks no mean reversion is observed finally we report asymmetries in the dynamic adjustment of the rer

a resolution of the equity premium puzzle abstract the introduction of a simple non time additive utility function can explain the equity premium puzzle noted by mehra and prescott with a reasonable value for the relative risk aversion coefficient

international trade and environmental quality a survey abstract international trade has been incorporating various aspects of environmental issues since 1970 the extent to which environmental problems might affect many facets of trade or vice versa has been the subject of considerable debate over these years in this article we have attempted to establish some of the links between international trade and environmental quality by performing a comprehensive literature review we discuss issues such as establishing direct and indirect effects of international trade on environmental quality effects of trade on economic development environmental quality and energy and their relation with each other and finally the role of governments and international organizations in this context studies have so far revealed some linkages between trade and environment through conventional trade theory however interactions between international trade and types of pollution their sink and assimilative capacity need to be analyzed using a general equilibrium approach currently very little knowledge and agreement on the nature of interactions between trade theories development process and environmental quality exist existing studies have shown that the structure of environmental regulations should be modified to reflect the existence of trade under imperfect competition therefore further research on the interaction between new trade theory and environmental regulation is needed also theoretical and quantitative analysis regarding the effects of environmental regulations on competitiveness and location decision is needed the intensity and type of environmental measures vary across issues and countries therefore harmonizing environmental measures creates an inefficient atmosphere and to assume that trade restrictions will either improve or reverse the environmental damages is a serious mistake given the dynamic and intricate nature of the problem trade and environment debate continues despite vast research and poses a challenge for researchers and policy makers in the foreseeable future

optimal dynamic taxation with distinctive forms of social status attainment we examine the role of both consumption and wealth induced social comparisons in setting dynamic optimal income taxation under complete information state invariant labor income taxes are used to remedy the externality caused by consumption induced social comparisons while state contingent capital income taxes are used to remedy the externalities caused by both consumption and wealth induced ones under incomplete information distinct types of agents are subject to an identical marginal capital income tax which removes social comparisons to solve the information problem low productivity agents could be subject to a lower marginal labor tax than high productivity agents which contradicts the traditional result in the mirrlees stiglitz models this article is protected by copyright all rights reserved

political economy of growth with a taste for status abstract this paper investigates the political economy of growth when individuals prefer high levels of relative consumption a pivotal voter determines the equilibrium tax on capital the revenues from which fund the provision of productive public goods the taste for status and the distributions of wealth and political power interact to generate stylized versions of oligarchies middle class democracies and populist democracies a rise in the taste for status increases the role of distributional concerns in policy preferences lowering growth in an oligarchy or populist democracy but increasing it in a middle class democracy in addition the egalitarian redistribution of wealth or political power causes growth to first rise and then fall as the equilibrium tax rate approaches and then exceeds its growth maximizing level generating inverse u shaped relationships between democracy and growth and inequality and growth

international evidence on sticky consumption growth abstract this paper estimates the degree of stickiness in aggregate consumption growth sometimes interpreted as reflecting consumption habits for thirteen advanced economies we find that after controlling for measurement error consumption growth has a high degree of autocorrelation with a stickiness parameter of about 0 7 on average across countries the sticky consumption growth model outperforms the random walk model of hall 1978 and typically fits the data better than the popular mankiw 1989 model though in a few countries the sticky consumption growth and campbell mankiw models work about equally well

social identification and redistribution in heterogeneous federations evidence from germany and belgium recent evidence of increasing income heterogeneity within developed countries has reignited debates concerning the redistribution of income and wealth in this article we contribute to this debate

less of a puzzle a new look at the forward forex market abstract the two country monetary model is extended to include a consumption externality with habit persistence the model is simulated using the artificial economy methodology the puzzles in the forward market are re examined the model is able to account for a the low volatility of the forward discount b the higher volatility of expected forward speculative profit c the even higher volatility of the spot return d the persistence in the forward discount e the martingale behavior of spot exchange rates and f the negative covariance between the expected spot return and expected forward speculative profit it is unable to account for the forward market bias because the volatility of the expected spot return is too large relative to the volatility of the expected forward speculative profit

assessing the implications of freer agricultural trade abstract the authors used an 11 region 22 commodity world net trade model to study the economic implications of agricultural policy reform in industrial market economies their analysis shows that elimination of protectionist agricultural policies would drive up world prices for most commodities and that the increases would be related to the levels of government assistance the results also indicate that consumers and taxpayers have had to bear the burden of agricultural support and that the costs to them outweigh benefits to producers by 30 the ec usa and japan account for 80 of the income gains from multilateral liberalization

optimal emissions tax rates under habit formation and social comparisons abstract the existing climate models ignore the behavioral anomalies of households and conclude that the optimal environmental tax rate should comove with business cycles however this assumption has received extensive criticism recently to this end this paper studies the optimal emissions tax rate when households are bounded rational in particular we calculate the optimal climate policy in a dynamic stochastic general equilibrium dsge model that features households with habit formation internal habits and social comparisons external habits compared to the benchmark model without consumption externality the social comparisons model amplifies consumption volatility but produces a similar response of pollutant emissions in the presence of the three types of economic shocks considered in contrast the habit formation model decreases the volatility of both consumption and pollutant emissions in contrast to the previous result that the optimal emissions tax rate should be procyclical we find that the social comparisons model largely mitigates the procyclicality of optimal emissions tax rates and the optimal emissions tax rates under the habit formation model remain constant in response to all the economic shocks considered

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

social comparisons and optimal taxation in a small open economy in this paper we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption the main

optimal taxation when consumers have endogenous benchmark levels of consumption i examine optimal taxes in an overlapping generations economy in which each consumer s utility depends on consumption relative to a weighted average of consumption by others the benchmark level of consumption as well as on the level of the consumer s own consumption the socially optimal balanced growth path is characterized by the modi ed golden rule and by a condition on the intergenerational allocation of consumption in each period a competitive economy can be induced to attain the social optimum by a lump sum pay as you go social security system and a tax on capital income

the real interest rate and aggregate supply abstract this paper analyzes the effects of the anticipated real interest rate on aggregate supply variables in a model where time to produce and variable capital utilization play a crucial role the potential importance of the present mechanism for business cycle theory lies in its ability to generate positive co movements of employment capital utilization labor productivity output and investment these variables are predicted to be affected negatively by the real interest rate reduced forms for output and employment are derived and tested with canadian data taking estimates of the real interest rate prevailing in the united states as the relevant exogenous price

time to produce or a keynesian is curve reply to john mccallum abstract this note comments on mccallum s conclusion that the estimates of a reduced form output equation from an open economy neoclassical model with a production lag capture in fact an is curve type of mechanism

multiple bgps in a growth model with habit persistence this paper establishes multiple balanced growth paths in an otherwise standard competitive growth model without externality or distortions and with households preference dependent upon how his her consumption compares to a habit stock formed by his her own past consumption the key feature in our model is that consumption forms habits in combination with existing habits this model establishes multiple equilibria because habit persistence induces an internal intertemporal complementarity effect among consumption flows with current consumption reinforcing future consumption as a result there exist two balanced growth paths with one path exhibiting low consumption and habits and high economic growth and the other path exhibiting high consumption and habits and low growth that is not necessarily a development trap both steady states are saddles but global indeterminacy arises where a high balanced growth path co exists with a low balanced growth path where the two equilibrium paths cannot be pareto ranked and history need not matter for the selection of the equilibrium path

agricultural trade negotiations as a strategic game abstract this study views multilateral trade negotiations as a strategic game among nations or regions including taxpayer consumer and producer components payoffs are calculated from an intermediate run international trade model initialized with 1989 data for the public at large the nash equilibrium and socially optimal outcome is liberalization of trade unilateral or multilateral maintenance of the status quo of market distortions costing the world billions of dollars each year is rational only if producer payoffs are sovereign so that strategies optimal for producers are considered optimal for nations remedial policies are discussed including opportunities for economic education political system reform and less incentives for producers to scuttle multilateral trade negotiations

testing motives for charitable giving a revealed preference methodology with experimental evidence abstract a large economics literature seeks to understand the reasons why individuals make charitable contributions fundamental features of most models of charitable giving are the inclusion of externalities induced by other agents and the lancasterian characteristics approach to specifying utility functions this paper develops a general revealed preference methodology for testing a variety of preference structures that allow for both externalities and characteristics the tests are simple linear programs that are transparent computationally efficient and straightforward to implement we show how the technique applies to standard models of privately provided public goods and novel models that account for other regarding preferences based on relative consumption and donations among individuals we also conduct an original experiment that enables testing and comparing many models on a single data set our experiment design allows us to focus on intrinsic motivations which are often hard to disentangle from other extrinsic or image effects in field data the results provide the first revealed preference evidence on the importance of social comparisons when individuals make charitable contributions models that include preferences for either relative consumption or donations yield significantly greater explanatory power than the standard model of impure altruism

volatile and persistent real exchange rates with or without sticky prices the flexible price two country monetary model is extended to include a consumption externality with habit persistence two methodologies are employed to explore this model s ability to generate volatile and persistent exchange rates in the first actual data is used for the exogenous driving processes in the second the model is simulated using estimated forcing processes the theory in both cases is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates

challenges in quantitative economic analysis in support of multilateral trade negotiations abstract a wide range of economic analysis of agricultural trade liberalization was performed prior to and during the uruguay round of trade negotiations views differ as to the effectiveness of this research although most would agree that it became less relevant as the negotiations progressed this paper reviews the contributions of economists to the trade liberalization debate with an emphasis on the quantitative assessment of multilateral agricultural trade liberalization with a new round of agricultural trade negotiations scheduled to begin in 1999 it is crucial that the quantitative work required to support these negotiations begin in the near future the authors conclude that the uruguay round outcome provides numerous challenges and opportunities in analyzing the traditional agenda of agricultural trade liberalization in addition new issues will be added to the agenda of the next round of negotiations these include trade and the environment competition policy and intellectual property rights it is important that economists begin to develop a research agenda that can address these issues and become activists in addressing these topics in public forums

consumption network effects in this paper we study the relevance and mechanics of consumption network effects we use long panel data on the entire danish population to construct a measure of consumption based on administrative tax records and define the peer groups in terms of workplace occupation education and age we then apply an iv strategy and fixed effect models to recover the effects our instruments arise naturally from the network structure and firms shocks the estimated effects are statistically significant and relevant for policies as they generate non negligible multiplier effects further the results are consistent with a keeping up model

a variety expansion model of growth with external habit formation abstract this paper introduces consumption externalities into one of the base line models of growth in which continuing expansion of product variety sustains long term growth we assume that consumers set a benchmark stock of consumption for each good so that there are commodity specific external effects each good is produced by a monopolistically competitive firm and the firm exploits the presence of consumption external effects in determining its profit maximizing price given those settings we show that the introduction of consumption externalities may affect the balanced growth characterization transitional dynamics and policy effects in fundamental manners

a test of a keynesian alternative to hercowitz s aggregate supply theory abstract hercowitz 1986 estimates aggregate output and hours equations which are derived from a new classical model of aggregate supply under an alternative interpretation his aggregate supply equation is in fact an is curve with one omitted variable while his hours equation is best interpreted as an okun s law relationship when the hercowitz equations are nested in more general formulations which incorporate these alternatives the new classical restrictions are rejected resoundingly

the relative inefficiency of quotas the cheese case the nonequivalence of tariffs and quotas under a wide variety of circumstances is well established in economic theory this study considers heterogeneity as a source of nonequivalence and demonstrates its practical importance where restriction is inevitable the bias of economists in favor of price instruments is not thoroughly grounded this study should help provide a foundation the point of departure from the equivalence model is differentiation of products

keeping up with the zhangs and house price dynamics in china abstract this paper studies the effect of social interactions on house price dynamics in china we first present household level evidence on chinese households tendency to keep up with the home ownership status of their communities keep up with the zhangs by means of a dynamic stochastic general equilibrium model we then study the impact of these housing consumption externalities on housing demand and prices our bayesian estimation and simulation reveal that these externalities significantly increase house prices in the long run steady state and amplify their response to shocks housing tax policies can mitigate the amplification effects

the effects of trade liberalisation abstract the liberalisation of agricultural trade has been an important component of the uruguay round of multilateral trade negotiations under the gatt a considerable amount of research effort has been expended on estimating the costs of agricultural protectionism most of this activity has been based on a partial equilibrium framework with conventional quantification of the distributive benefits and costs to be expected from liberalisation attempts at general equilibrium analysis have been fewer but provide evidence of the economy wide gains from the removal of protection whilst these analyses have had a powerful influence on the nature of the political discussions on agricultural trade policy they have not helped define the details of politically acceptable alternatives to current agricultural supports the reasons are the technical economic data and statistical problems which restrict the interpretation of results to broad generalisations and the failure of analyses to focus on the most important political concerns indicating these concerns may help define the focus of future research but it is doubted if conventional economic analysis has very much more to offer

consumption commitments and habit formation we analyze the implications of household level adjustment costs for the dynamics of aggregate consumption we show that an economy in which agents have consumption commitments is approximately equivalent to a habit formation model in which the habit stock is a weighted average of past consumption if idiosyncratic risk is large relative to aggregate risk consumption commitments can thus explain the empirical regularity that consumption is excessively sensitive and excessively smooth findings that are typically attributed to habit formation unlike habit formation and other theories but consistent with empirical evidence the consumption commitments model also predicts that excess sensitivity and smoothness vanish for large shocks these results suggest that behavior previously attributed to habit formation may be better explained by adjustment costs we develop additional testable predictions to further distinguish the commitment and habit models and show that the two models have different welfare implications

adaptation anticipation and social interaction in happiness an integrated error correction approach abstract adaptation anticipation and social reference effects on happiness are strongly interrelated phenomena however in the existing empirical literature these phenomena are mainly studied in isolation from each other therefore using soep panel data for the years 1984 2007 this study offers an integrated investigation of the implications of these three phenomena for the dynamics of individual life satisfaction i focus on the short and long run effects of income and social reference income but i control for similar dynamics with respect to a large set of control variables gmm estimates for instrumented income variables in an error correction model indicate an insignificant future income effect a significant and positive current income effect and an insignificant long run income effect on life satisfaction with significant hedonic adaptation social reference income has a significant negative and strong impact in the long run but not in the short run consequently increasing own income and reference income by the same percentage tends to have an insignificant effect in the long term but a significant and positive effect in the short term adaptation to an income shock and reinforcement of a reference income shock take place for more than 90 within three years on the basis of these results a more comprehensive explanation of the easterlin paradox than those given in the literature is presented

jealousy and equilibrium overconsumption the idea that the happiness of an individual depends upon the consumption of others is widely viewed as an important feature of our shared social existence recent research in finance has used this idea through consumption externalities to explore asset pricing anomalies consumption externalities potentially break the link between pareto optimality and competitive equilibria and open the door for beneficial government intervention e g lars ljungqvist and harald uhlig 2000 in this paper we delineate two effects that a consumption externality may have an increase in aggregate consumption may a raise the marginal utility of individual consumption relative to leisure and or b lower an individual s utility level we refer to a as keeping up with the joneses henceforth kuj following jordi gali 1994 and we refer to b as jealousy jealousy is a distinct concept from kuj under kuj an individual derives greater utility from additional own consumption relative to leisure when others consume more at the same time higher per capita consumption holding fixed individual consumption can trigger either jealousy so that individual utility falls or admiration so that individual utility rises in section i of this paper we show that jealousy implies that the laissez faire equilibrium consumption level is greater than the optimal level whether preferences exhibit kuj is not necessary for this main result intuitively in the presence of jealousy consumption is similar to pollution overpollution exists because individuals do not take into account the cost of polluting on others not because an increase in economywide pollution makes the return to individual polluting higher similarly overconsumption exists because individuals do not take into account the negative effect of own consumption on jealous others things go in the opposite direction when individuals are admiring in section ii we consider a functional form that encompasses several existing models we show that jealousy determines the optimal tax to correct overconsumption and that kuj is mainly important for asset pricing

we are what we eat obesity income and social comparisons abstract the empirical evidence of a non monotone relation between income and obesity is not well explained we build a theoretical model combining income inequality and social comparisons to explain the link between income and obesity and study tax policy implications for fighting obesity we assume that differences in food consumption patterns between poor and wealthy households partly reflect positionality which is the concern for social status our key assumption is that positionality for low calorie food consumption is positively related to a country s wealth in this framework body weight outcomes reflect competing income and positionality effects yielding the following results we explain the link between average obesity rates and standards of living and suggest the existence of a kuznets curve for obesity in accordance with empirical evidence for cross sections of the population we explain the observed correlation between income and obesity which is positive in poor countries and negative in rich countries we find that increasing the relative cost of high calorie food is less effective at decreasing the relative weight of poor individuals in rich countries than in poor countries

the optimal mix between funded and unfunded pension systems when people care about relative consumption the paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption in pay as you go systems with fixed contribution rates pensions are tied to wages this lowers the uncertainty of individuals future relative position thereby increasing the attractiveness of unfunded systems the paper shows analytically that the optimal share of funding decreases with the importance of relative standing a calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding for reasonable assumptions it is typically around 20

consumption externalities habit formation and equilibrium efficiency we analyze the welfare properties of the competitive equilibrium in a capital accumulation model where individual preferences are subject to both habit formation and consumption spillovers using an additive specification for preferences according to which the argument in the utility function is a linear combination of present and past values of own consumption and consumption spillovers we analyze the circumstances under which these spillovers are a source of inefficiency it is shown that consumption externalities have to interact with habits in order to generate an inefficient dynamic equilibrium finally we characterize optimal tax policies aimed at restoring efficient decentralized paths

social network structure and status competition in status competition studies the utility of heterogeneous individuals typically depends on an economy wide average indicator of status in our model emulative and jealous agents are embedded in an exogenous network where agent specific reference group is determined by the direct link emanating from the agent similarly to ghiglino and goyal 2010 but in a somewhat different framework we show that individual consumption is proportional to the agent s outbound katz bonacich network centrality measure and equilibrium is generally inefficient more important the negative externality associated with each agent depends on her inbound centrality measure the conspicuousness index a tax based on this index combined with a uniform lump sum transfer attains efficiency

goals and consequences of rice policy in japan 1965 80 the change in welfare of producers and consumers government cost and the deadweight loss arising from the various forms of government interventions into the rice market in order to protect domestic producers in japan are estimated in a partial equilibrium framework results of the quantitative analysis indicate that the motivation of the government was to minimize budget costs in achieving the target level of producer price support while consumer welfare had an insignificant weight in the government s objective function it is aiso found that acreage control is a second best policy to reduce social inefficiency produced from other forms of market distortions

monetary and fiscal policy under deep habits allowing habits to be formed at the level of individual goods deep habits can radically alter the fiscal policy transmission mechanism as the counter cyclicality of mark ups this implies can result in government spending crowding in rather than crowding out private consumption in the short run we explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors we then describe optimal monetary and fiscal policy in our new keynesian economy subject to the additional externality of deep habits and explore the ability of simple policy rules to mimic fully optimal policy we find that the presence of deep habits at empirically estimated levels can imply large externalities that significantly affect the conduct of monetary and tax policy however despite the rise in government spending multipliers implied by deep habits government spending is barely used as a stabilisation tool under the optimal policy

the relative income hypothesis abstract despite its theoretical dominance the empirical case in favor of the permanent income hypothesis is weak contrary to one of its basic implications a growing body of evidence suggests that rich households save a higher proportion of their permanent income than poor households we propose an overlapping generations economy where households care about relative consumption as a result an individual s consumption is driven by the comparison of his lifetime income and the lifetime income of his reference group a permanent income version of duesenberry s 1949 relative income hypothesis across households the savings rate increases with income while aggregate savings are independent of the income distribution

dynamic status effects savings and income inequality this paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society endogenous dynamic status effect in accordance with empirical evidence our theory replicates the contradictory historical facts of an increasing saving rate along with declining returns to capital over time by affecting the dynamics of the saving rate the dynamic status effect raises inequality thereby providing a behavioural mechanism for the observed diverse dynamics of income inequality across countries in countries in which the dynamic status effect is strong weak inequality rises declines over time in response to a positive productivity shock

a model of redistribution under social identification in heterogeneous federations abstract redistribution of resources to accommodate income heterogeneity within a federation is often fiercely debated e g belgium germany or the european union to help elucidate potential drivers behind such debates this article builds on social identity theory to develop a theoretical framework linking jurisdictional identification and preferences towards intra federation redistributive financial flows we show that federal rather than local identification can lead individuals to shift their redistribution preferences against their narrowly defined personal economic interest in contrast to predictions of standard models the sign and strength of this effect depends crucially not only upon individuals characteristics but also upon the social groups i e regions to which they belong we furthermore illustrate that federal rather than regional identification should be more widespread in poorer and or more populous regions within a federation but less common in regions which are very homogeneous internally or very dissimilar from the rest of the federation

when does uncovered interest parity hold a consensus is emerging that returns to the currency carry trade are driven by two factors one of these is probably consumption risk but there is widespread disagreement about the identity of the remaining factor this paper bolsters the case for volatility being the unknown factor a structural model that specifies that monetary volatility is the second factor is tested for 56 monetary regimes using the artificial economy methodology the negative slope in the fama regression arises when monetary volatility is low and the precautionary savings motive dominates the intertemporal substitution motive when monetary volatility is high the fama slope is positive in line with uncovered interest parity we conclude that given the predominance of precautionary savings the degree of monetary volatility explains whether uncovered interest parity holds

relative consumption and tax evasion abstract relative consumption effects or status concerns that feature jealousy in the sense of dupor and liu 2003 boost consumption expenditure if consumption is financed by labour income such status considerations increase labour supply and hence the tax base a higher taxable income in turn can make tax evasion more attractive we show for various specifications of preferences that the tax base effect generally dominates consequently relative consumption effects tend to reduce tax evasion this is true irrespective of whether tax parameters are exogenous guarantee a balanced budget or are set optimally

in search of a theory of debt management the complete market approach to government debt management argues that a portfolio of non contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits however this approach recommends huge fluctuations in positions enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications these extreme volatile and unstable features are undesirable for two reasons firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model secondly for even miniscule transaction costs governments prefer a balanced budget rather than the large positions complete markets recommends the complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness e g transaction costs liquidity effects robustness etc and which need to be explicitly incorporated into the portfolio problem

the effect of religiosity and religious festivals on positional concerns an experimental investigation of ramadan this article examines the effect of religion on positional concerns using survey experiments we focus on two of the dimensions of religion degree of religiosity and religious festivals by conducting the experiments during both the most important day of ramadan the night of power and a day outside ramadan we find that ramadan overall has a small and negative impact on positional concerns detailed analyses based on the sorting of individuals degree of religiosity reveal that the decrease in the degree of positional concerns during ramadan is mainly explained by a decrease in positionality among individuals with a low degree of religiosity

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

asset prices and real exchange rates with deep habits i introduce an external habit for each consumption good known as deep habits into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries i show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments calibrated to a set of ten countries the model reproduces the cross sectional evidence on currency risk premiums when sorting on interest rates interest rate volatility innovations to global exchange rate volatility and value hence the model provides an equilibrium interpretation of these empirical regularities

optimal monetary policy with endogenous entry and product variety deviations from long run price stability are optimal in the presence of endogenous entry and product variety in a sticky price model in which price stability would be optimal otherwise long run inflation deflation is optimal when the benefit of variety to consumers falls short of exceeds the market incentive for creating that variety the desired markup price indexation exacerbates this mechanism plausible preference specifications and parameter values justify positive long run inflation rates however short run price stability around this non zero trend is close to optimal even in the presence of endogenously time varying desired markups that distort the intertemporal allocation of resources

does self fulfilment of the inflation expectation exist abstractthis study examines the causal relationship between the actual and expected inflation in the u s using the bootstrap granger full sample causality test and sub sample rolling window estimation test to illustrate the self fulfilment of inflation expectations the full sample result indicates that there is a bidirectional causality between the actual and expected inflation showing the possibility of self fulfilment of inflation expectations which illustrates that inflation is driven by inflation expectation however considering structural changes in two series we find that the short run causal nexus between the actual and expected inflation using full sample data are fraudulent by adopting a time varying rolling window approach to revisiting the dynamic causal relationships this article identifies that the actual inflation has both positive and negative impacts on the expected inflation in distinct sub periods nevertheless inflation expectation exerts only negative effects on the actual inf

relative consumption of housing marginal saving subsidies and income taxes as a second best policy this paper analyzes whether marginal taxation of labor and capital income are useful second best instruments for internalizing the externalities caused by conspicuous housing consumption when the

consumption habits in an overlapping generations model abstract this paper introduces consumption habits in the blanchard 1985 overlapping generations model it shows that steady state capital and consumption are higher if individuals have habits than otherwise moreover inward habits lead to higher steady state capital and consumption compared to outward habits

aspirations habit formation and bequest motive we analyze how the presence of endogenous preferences affects the altruistic bequest motive from parents to children we will show that the existence of habits raises the threshold value of the intergenerational discount factor above which altruistic bequests are positive while aspiration formation could push this value down therefore the dynamic inefficiency of the economy with no altruism is not sufficient to prevent the bequest motive from being operative under aspiration formation we also discuss the implications of public debt when the bequest motive is inoperative and preferences exhibit habit and aspiration formation

whither russia a review of andrei shleifer s a normal country in this review the author reflects on the heated debates around views about russia s postcommunist transition expressed in essays collected in new andrei shleifer s book a normal country russia after communism harvard university press 2005 which were initially published at different times during transition she focuses on the three questions that have been in the center of the debate among academics and policymakers what should the sequencing and the speed of reforms be should a country have political centralization for fiscal decentralization to be efficient is russia normal the author argues that russia s most recent history provides convincing evidence in support of the logic of political and economic transformation as it was understood by shleifer as early as the beginning of the 1990s

diversification and its discontents idiosyncratic and entrepreneurial risk in the quest for social status social status concerns influence investors decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks i model such concerns by emphasizing the desire to get ahead of the joneses which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk the model predicts that investors hold concentrated portfolios in equilibrium which helps rationalize the small premium for undiversified entrepreneurial risk in the model status concerns are more important for wealthier households consequently these households own a disproportionate share of risky assets particularly private equity and experience greater volatility of consumption consistent with empirical evidence diversification and risk sharing are fundamental principles of modern finance and macroeconomics however empirical evidence suggests that household portfolios are poorly diversified with many people reporting substantial holdings of a single stock for the wealthiest households large shares in closely held businesses constitute a particularly important source of risk e g heaton and lucas 2000a it is not surprising that entrepreneurs bear substantial undiversified risk since it is important for mitigating moral hazard and or adverse selection problems yet from a standpoint of portfolio theory entrepreneurship does not appear to be well compensated implying that many investors are willing to take poorly rewarded risks despite the availability of superior investment opportunities such as public equity that earns a large risk premium e g moskowitz and vissing j0rgensen 2002 hall and woodward 2007

comment on the campbell cochrane habit model campbell and cochrane 1999 formulate a model that successfully explains a wide variety of asset pricing puzzles by augmenting the standard power utility function with a time varying external habit that adapts nonlinearly to current and past average consumption in the economy we demonstrate that their preference specification has the unusual implications that habit can move negatively with consumption and that the social marginal utility can be negative as a result government interventions that occasionally destroy part of the endowment can lead to substantial welfare improvements jel code e21 e44 g12 ljungqvist stockholm school of economics and new york university email lars ljungqvist hhs se uhlig university of chicago email huhlig uchicago edu we thank fernando alvarez and john cochrane for criticisms and suggestions on our earlier exploration of the properties of the campbell cochrane preference specification the present exposition has benefitted much from the comments of the editor and three anonymous referees ljungqvist s research was supported by a grant from the jan wallander and tom hedelius foundation uhlig s research has been supported by the nsf grant ses 0922550

conspicuous leisure optimal income taxation when both relative consumption and relative leisure matter previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons this paper considers a two type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure increased consumption positionality typically implies higher marginal income tax rates for both the high ability and the low ability type whereas leisure positionality has an offsetting role however this offsetting role is not symmetric concern about relative leisure implies a progressive income tax component i e a component that is larger for the high ability than for the low ability type moreover leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen

genuine saving and positional externalities much evidence suggests that people are concerned with their relative consumption yet positional externalities have so far been ignored in savings based indicators of sustainable development this

reign in hell or serve in heaven a cross country journey into the relative vs absolute perceptions of wellbeing abstract questionnaires exploring the relativist vs absolutist perception of wellbeing are administered to 3883 students in eight different countries four low income countries bolivia brazil kenya and laos 1924 respondents and four high income countries italy sweden switzerland and the uk 1959 respondents our data reveal that wellbeing is perceived mainly in relative terms with the strength of relativism being higher for respondents in high income countries however when the satisfaction of some basic needs is at stake the absolutist concern becomes powerful personal characteristics such as gender and background of studies have a significant role in determining respondents perception of wellbeing finally additional insights emerge from our study interpersonal comparisons take place by looking both upward and downward along the income scale not only income ranking but also the magnitude of reference incomes plays a role and the perception of wellbeing is more elastic to absolute rather than relative income

individual well being in a dynamic perspective this paper explores the determinants of individual well being as measured by self reported levels of satisfaction with income making full use of the panel data nature of the german socio economic panel we provide empirical evidence for well being depending on absolute and on relative levels of income in a dynamic framework this finding holds after controlling for other influential factors in a multivariate setting the main novelty of the paper is the consideration of dynamic aspects individual s own history as well as the relative income performance with respect to the others living in the society under analysis do play a major role in the assessment of well being

government intervention in poultry industries a cross country comparison government intervention affects agricultural industries both in the prices received for products and the prices paid for inputs this paper attempts to demonstrate that analysis of the impact of government intervention on these industries should consider both sets of distortions the concept of effective protection is used to determine the net price distortion the canadian german and british poultry industries during 1975 77 are analyzed to show the value of such an approach results show that consumers have paid higher product prices in each country but producers have not necessarily benefitted moreover social costs of intervention have been high