Habit persistence in overlapping generations economies under pure exchange

This paper analyzes the implications of habit persistance preferences for savings and equilibrium dynamics in the contest of an overlapping generations model under pure exchange. We show that habit persistence can convert an economy which otherwise has no role for government currency into an economy where there does exist a role for such currency. Further. the increased saving induced by habit persistence implies that governments are able to float higher levels of deficits in such economies relative to economies without habit persistence. The paper also shows that relative to standard preferences. habit persistence preferences cause the savings function to become decreasing in the rate of interest at lower values for relative risk aversion. This is of particular interest since the payer demonstrates that this result is closely related to the relative success of models with habit persistence in explaining the equity premium puzzle. (C) 1998 Academic Press.