This paper introduces consumption habits in the Blanchard (1985) overlapping-generations model. It shows that steady-state capital and consumption are higher if individuals have habits than otherwise. Moreover, "inward habits" lead to higher steady-state capital and consumption compared to...

The present paper explores the fiscal policy implications of intergenerational habit formation in a Blanchard overlapping generations small open economy model. Three main conclusions emerge. (1) When individuals are finitely lived and have habits which they pass on to their descendants, the...