Status and Multiple Growth Regimes

In order to explain multiple growth regimes, one of the working hypotheses is based on initial conditions. Using a standard optimal growth with the status effect represented by wealth a la Friedman (1953), this paper obtains multiple growth regimes based on initial conditions without reliance on other assumptions such as nonlinearities of production or consumption functions and heterogeneous agents/savings behavior. With the status effect, the resulting equilibrium distribution is characterized by a group with a lower level of income and another group with a higher level of income. Globally, a sufficiently strong monetary policy may be an instrument in order for an economy in poverty traps to take off and become wealthy in the long run. Locally, our model sheds light on the relationship between money/inflation and capital in the long run that, given general cash-in-advance constraints on investment relative to consumption, is determined by the curvature of the utilities of wealth and consumption.