Difference or Ratio: Implication of Status Preference on Stagnation

Abstract

We consider a dynamic macroeconomic model of households that regard relative affluence as social status. The measure of relative affluence can be the ratio to, or the difference from, the social average. The two specifications lead to quite different results: under the ratio specification full employment is necessarily realized, whereas under the difference specification there is a case where a persistent shortage of aggregate demand arises. Affluence comparison experiments provide empirical indications that the difference specification is far more persuasive than the ratio specification. Therefore, persistent stagnation may well occur.

Keywords: status, stagnation, unemployment

JEL Classification: C91, E12, E24