Growth or Stagnation: Economic Consequences of Status Preference

Abstract:     
Using a dynamic optimization model with status preference this paper shows that depending on the object of people's status preference an economy exhibits a completely opposite performance; permanent growth or persistent stagnation. If the object is a producible asset (viz. real capital), new employment is created and extra production is invested in capital, which generates permanent growth even under decreasing returns to capital. If it is an unproducible asset (viz. money), commodity demand is not created and deflation occurs. Full employment is never reached under nominal wage sluggishness although prices and wages continue to adjust.

Number of Pages in PDF File: 22

Keywords: Status Preference, Long-Run Growth, Persistent Unemployment.

JEL Classification: E12, E24, O41

working papers series