Keeping up with the ageing Joneses

In this paper we consider the implications of relative consumption externalities in the Blanchard-Yaari overlapping generations framework. Unlikemost of themacroeconomic literature that studies this question, the differences between agents, and, thus, in theirrelative position, persist in equilibrium. We show in our fixed employment model that consumption externalities lower consumption and the capital stock in long-run equilibrium, a result in sharp contrast to the recent findings of Liu and Turnovsky (2005). In addition, we solve for the intertemporal path of the economy to investigate its response to demographic shocks, specifically, to permanent changes in the birth and death rates.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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