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As we know, people's wants and needs are influenced by their society and by the behaviors and possessions of their friends, neighborrhoods, and peers. Not only does people's happiness depend on their own absolute level of endowments, possessions, and achievements, but it also relies upon also on their relative standing, or, their `social status'. Theise kinds of characteristics in people's preferences is therefore affecting their consumption decisions, and, consequently, leading tohave some implications on the observed household and aggregate savings behavior. Only Robinson Crusoe on the deserted island would be capable of forming his preferences in a manner wholly independent from the behavior of his social environment. But Obviously, `no man is an island' (John Donne); and even Robinson got hisoccupied a community after Friday arrived (Knell, 1999). One of the observations of suchThe interdependent preferences of households is are described precisely by athe wildspreadingwidespread sayingimperative, as the saying goes,: `tTo keep up with the Joneses.' Whenever an economy is growing, and especially. when it is taking off, the social and economic environments around peopleof individuals are changing dramatically. Not only do their peoples own possessions increase;, so do those of people others around them do so either. Consumption levels will rise as a consequence of the rising income tide. Besides the rise inAs the absolute consumption level increases, the

criteria for happiness also shift. If one an individual cannot keep up with such rises, he suffers from the disutility results from of falling behind, even though the absolute level of his consumption has also increased compareding with that what he had before. More specifically, at the mainstream level of a society, everyone seems to know what minimum comfort is and what the necessary requirements are for various levels and styles of living. As noted by Rainwater (1974),: `In terms of housing also the 1908 comfortable family was not as well off as 1960 charity-class family---it had only three rooms, but it was specified the rooms must be decent and sanitary. The New York City family that hads just enough money to afford the subsistence budget, despite the fact that it could eat more high protein food, had a larger apartment and enjoyed an electric refrigerator and iron would presumably count themselves extremely unfortunate. The difference can be explained only in terms of the social meanings of these differing possessions and the style of life that went with them in the two periods.' It is unlikely that every member in theof an economy has the same income growth rate when the economy is growing. Some cohorts may lose their position/status and fall behind, especially. those whoif they have a relatively lower growth rate in their income. If these people have the preferences with consumption externality characteristics, then they will feel unhappy with the disutility results from of falling behind. For example, in the 1970s, Chinese workers in the 70s who would planning for retirement retire soon in China could not anticipate the mobile phone, full set of modern electric household appliances, traveling around during

holidaysholiday travel, and other `luxury' goods that would be the consumption norm in China two decades in the futurelater, especially. in the urban areas. Being benefited from theWhen an economy is rapidly growing economy, income levels in such a society willare sure to rise for sure. The young, however, will probably have higher income growth than the old will. Consequently, these young guys, or the juniors, may build up a new highercreate a new social norm thatn is higher than it used to be. To `keep up with the juniors', therefore, people will try to build up their own coffer that mayto help them reinforce their consumption capability and to make up for the possible falls drop in their social status when they are grow old and retire. It is an interesting research topic to address the growth-leading-savings puzzle in within a consumption externality view, and this is exactly what this chapter is tryingwill attempt to do. NamelySpecifically, the main task of this chapter is to interpret the aforementioned divergence between traditional neoclassical economic theories and growth-leading-savings observations in within a consumption externality approach. I argue that the observation of the reason that such phenomena are observed is because ofis attributable to the consumption externality in people's preferences. In other words,, i.e. it is the consumption externality in the households' preferences that leads to such observations. With positive consumption externality, namely, people care about the societal consumption level; and suchas the societal consumption level increases the marginal utility of people's own consumption, people try to save more this within a given period to make up their fall losses if they expect that average income in the economy will grow faster than theirs in the next following period.

STherefore, such interdependence of households' preferences results in a scenario where higher economic growth leads to a higher savings rate in a steady state. Consumption externality (also referred to as interdependent preferences) was first introduced by Duesenberry (1952) in order to reconcile cross-sectional and time series evidence on consumption. Gali (1994) introduces placed such consumption externality in two standard models---a static CAPM model, and a multi-period asset pricing model--- and analyzed its impacts on optimal portfolio decisions and equilibrium asset prices are analyzed. In Harbaugh (1996), the consumption externality is was introduced into a simple two-period model. Harbaughe showeds that rather than increasing consumption, concerns of relative consumption can induce a fear of falling behind which that raises savings. More specifically, because the an increase rise in the societal average consumption will raise the marginal utility of consumption due to the so-called demonstration effect, the higher the degree of consumption externality, the more resources will be saved for the next period's consumption in the equilibrium. As the societal income growth rate increases, this fear of falling behind intensifies, allowing for a positive effect of growth on savings rates. Though Harbaugh's model provides some useful insights of into the effects of consumption externality on the household savings rate when the societal income grows, there is not production is not included in the model; and the income growth does appears to simply come from the God. In most of the case, Ffurthermore, the model discusses only the case situation where the degree of consumption externality equals is equal to 1, which is only a special case of consumption externality.

In Rauscher (1997), consumption externality is incorporated into a Ramsey model, and the effects of this modification on economic growth and optimal tax policy are examined. He assumes that the instantaneous utility of individuals depends not only on absolute consumption, as in the standard model, but also on relative consumption. This specification expresses two ideas: 1) economic agents care about their relative position in society, and 2) social status is determined by relative consumption and relative consumption is defined as the ratio of an individuals own consumption over the societal average. Rauscher assumes a particular specification of preference that instantaneous utility is additively separable into own and relative consumption, where its dependence on own consumption is captured by an isoelastic function. One of the main objectives of Rauscher's paper is to compare economies in which relative consumption plays a role to with economies without status competition, mainly focusing on the steady state capital level and the growth rate. Following the works done byof Rauscher, Fisher and Hof (2000) generalized Rauscher's his results by using general specifications of the instantaneous utility function that encompass the functional forms employed by Rauscher and Gali. The key concept they use in theirof Fisher and Hofs paper is was the effective intertemporal elasticity of substitution, which is induced by the existence of consumption externality. They discussed the observational equivalence between economies with consumption externality that arises from status-seeking behavior and externality-free economies. The patterns of economic growth under some special preferences that make the observational equivalence occur are were studied, both in a

decentralized economy and in an economy with a social planner. Dealing with the issue of optimal taxation, they considered both capital tax and consumption tax and showed that the rule of optimal taxation depends on the difference between the effective intertemporal elasticity of substitution and its socially optimal counterpart. Though the results in the papers aforementioned papers have shed some lights on the effects of the consumption externality on the economy, they are mostly concerned about with the growth of the economy. They are in some sense modified growth models, and savings in these models doesn't acquire receive as much attention that as it deserves. Therefore, it is suggested that more works be donework be conducted on the impact of consumption externality on savings. This chapter is such a tryrepresents a gesture in this research direction.