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Relative consumption, relative wealth, and long-run growth: when and why is the standard analysis prone to incorrect conclusions?

Published online by Cambridge University Press:  24 August 2021

Franz X. Hof  and
Klaus Prettner
Franz X. Hof
Affiliation:
Institute of Statistics and Mathematical Methods in Economics, Research Unit Economics (105-3), Vienna University of Technology, Wiedner Hauptstr. 8–10, 1040 Vienna, Austria
Klaus Prettner*
Affiliation:
Department of Economics, Vienna University of Economics and Business, Welthandelsplatz 1, 1020 Vienna, Austria Wittgenstein Centre for Demography and Global Human Capital (University of Vienna, IIASA, VID/ÖAW), Vordere Zollamtsstraße 3, 1030 Vienna, Austria
*
*Corresponding author. Email: klaus.prettner@wu.ac.at.
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Abstract

We employ a novel approach for analyzing the effects of relative consumption and relative wealth preferences on economic growth. In the pertinent literature, these effects are usually assessed by examining the dependence of the growth rate on the two parameters of the utility function that seem to measure the strength of the relative consumption and the relative wealth motives. Applying our fundamental factor approach, we identify specifications in which the traditional approach yields incorrect qualitative conclusions. The problematic specifications have the common unpleasant property that the parameter that seems to determine the strength of the relative consumption motive actually also affects the elasticity of intertemporal substitution of absolute consumption (and the strength of the relative wealth motive). Since the standard approach is unaware of the additional effect(s), it attributes the total change in the growth rate incorrectly to the change in the strength of the relative consumption motive.

Keywords

Quest for statusEconomic growthSocial optimalityDeep factorsD31D62O10O30
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 1 , January 2023 , pp. 250 - 274
Copyright
© The Author(s), 2021. Published by Cambridge University Press

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