ANTICIPATED FUTURE CONSUMPTION IN AN ENDOGENOUS GROWTH MODEL

We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and...

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Bibliographic Details
Published inMacroeconomic dynamics Vol. 26; no. 5; pp. 1202 - 1238
Main Authors Gómez, Manuel A, Monteiro, Goncalo
Format Journal Article
LanguageEnglish
Published Cambridge Cambridge University Press 01.07.2022
Subjects
Consumption
Economic theory
Economics
Externality
Fiscal policy
Growth models
Habits
Macroeconomics
Market equilibrium
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Summary:We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and the case in which agents derive utility from anticipation of other people’s future consumption—outward-looking or external anticipation. We characterize the effects of introducing a forward-looking consumption reference on the dynamics of the economy. Whereas the inward-looking economy features transitional dynamics, the outward-looking economy does not. The distortions caused by the externality in the economy with external habits can be corrected by subsidizing income at a time-varying rate or by means of a tax on consumption at a decreasing rate. We contrast the equilibrium dynamics of our specification to the more standard specification of the habit formation consumption reference point. Numerical simulations supplement the theoretical analysis.
ISSN:1365-1005
1469-8056
DOI:10.1017/S136510052000053X