Consumption Externalities and Macrceconomic Dynamics

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The purpose of this study is to explore the role of consumption external effects in overlapping generations economies. Most of the existing investigations on macrodynamic models with consumption externalities have utilized the representative agent models. Since the private and average levels of consumption coincide each other in the representative agent economies, the effects of consumption externalities are mostly quantitative rather than qualitative in most of the foregoing studies. We extend the standard two-period lived OLG models of capital accumulation by introducing external effects among consumption activities of the agents. The key difference between the representative agent and the OLG settings is that the contemporaneous external effects of consumption involve the intergenerational as well as intragenerational externalities in the OLG economy.The general conclusion of this project is that the dynamic behaviors of OLG economies heavily depend on how the consumption external effects are specified. We have found that even simple models may yield multiple steady states and indeterminacy of equilibrium. In addition, policy implications in the model economies would be fundamentally different form those obtained in the representative agent counterpart. We have confirmed these facts in the context of alternative settings of OLG economies with various specifications of preferences and technologies.