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Observational equivalence of balanced growth with external habit formation
Author(s) -
Wang Wei
Publication year - 2021
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/1467-8454.12211
Subject(s) - observational equivalence , equivalence (formal languages) , habit , observational study , growth model , mathematics , function (biology) , enhanced data rates for gsm evolution , growth function , existential quantification , mathematical economics , econometrics , computer science , pure mathematics , statistics , combinatorics , psychology , social psychology , telecommunications , evolutionary biology , biology
This paper investigates two scenarios in the external habit formation model with concave utility functions. When the utility function is weakly concave, there exists a unique history‐dependent balanced growth path (BGP) under a knife‐edge existence condition. When the utility function is strictly concave, a unique BGP exists under a more generic condition. I find that the BGPs in the two scenarios are observationally equivalent. The knife‐edge condition limits the applicability of the first scenario. The generic existence condition and the observational equivalence result mitigate this issue. I show that our model can help understand a variety of growth patterns of countries that differ in their fundamentals substantially.