Anticipated Consumption and its Impact on Capital Accumulation and Growth: 'Forward-Looking' vs. 'Backward-Looking' Consumption Reference

It has long been argued that the anticipations of some future event will impact current consumption and well-being in advance of the occurrence of the event itself. This paper introduces this idea of anticipated pleasure into the Ramsey growth model, by assuming that in addition to his own current consumption, an agent’s current utility depends upon a reference consumption level that is based on expected future consumption. Two alternative specifications of the anticipated future consumption levels are considered: an external index and an internal index. We analyze the macrodynamic equilibrium, comparing it to both the standard Ramsey model, and the more familiar parallel model of habit formation. We establish a number of theoretical propositions characterizing the impact of the anticipated consumption reference on the transitional dynamics and long-run equilibrium, supplementing these with extensive numerical simulations.