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RELATIVE WEALTH, GROWTH, AND TRANSITIONAL DYNAMICS: THE SMALL OPEN ECONOMY CASE

Published online by Cambridge University Press:  20 September 2010

Walter H. Fisher
Walter H. Fisher*
Affiliation:
Institute for Advanced Studies, Vienna
*
Address correspondence to: Walter H. Fisher, Institute for Advanced Studies, Department of Economics and Finance, Stumpergasse 56, 1060 Vienna, Austria; e-mail: [email protected].
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Abstract

In this paper we investigate the growth implications of relative wealth preferences in a small open economy model. Domestic capital accumulation, subject to installation costs, is the engine of economic growth in this framework. Crucial in deriving the balanced growth rate is the effective rate of return that arises from agents' status preferences. This results not only in a common balanced growth rate for consumption, the domestic capital stock, and net international financial assets, but also saddle-path dynamics in response to structural shifts. We investigate the short- and long-run dynamics of the model by considering the following standard fiscal shocks: (i) government expenditure, (ii) capital tax, (iii) tax on international financial assets, (iv) consumption tax. Among our results, we find that a permanent fiscal expansion leads to a temporary increase in growth and that a rise in the consumption tax results in a temporary decrease in growth.

Keywords

Status SeekingRelative WealthGrowthTransitional Dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Supplement S2: Public Policy, Externalities, and Economic Growth , November 2010 , pp. 224 - 242
Copyright
Copyright © Cambridge University Press 2010

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