Status seeking in the small open economy

In our modified version of the small open economy Ramsey model, agents have preferences over consumption and status, the latter determined by relative wealth. Contrary to the standard model in which an impatient country asymptotically mortgages all of its capital and labor income, this extension potentially yields interior steady states. This results from the fact that the effective rate of return becomes a function of consumption and net assets. Notably, a permanent increase in government expenditure crowds out long-run consumption more than one-for-one. Similarly, the effects of improvements in productivity on long-run consumption are magnified by relative wealth preferences. (c) 2005 Elsevier Inc. All rights reserved.