TY - JOUR

T1 - Relative consumption, relative wealth, and long-run growth: when and why is the standard analysis prone to incorrect conclusions?

AU - Hof, Franz, X

AU - Prettner, Klaus

PY - 2021

Y1 - 2021

N2 - 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.

AB - 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.

UR - https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/abs/relative-consumption-relative-wealth-and-longrun-growth-when-and-why-is-the-standard-analysis-prone-to-incorrect-conclusions/9ED18F01B5B283FE5C996A5F38B696E1

U2 - 10.1017/S1365100521000389

DO - 10.1017/S1365100521000389

M3 - Journal article

SN - 1365-1005

JO - Macroeconomic Dynamics

JF - Macroeconomic Dynamics

ER -