We address the issue of optimal growth when standard-of-living
aspirations are transmitted from one generation to the next. We
derive the condition for the optimal solution to be stable in the
saddle-point sense and show that this optimal solution may display
damped oscillations even when the planner does not discount the
utility of future generations (golden rule case). The
decentralization of the optimal solution aims at correcting the
inter-generational externality by use of an investment subsidy and
allows one to avoid socially damaging rushes on consumption in
expansion periods. It also allows one to stabilize output in the
case of competitive economies displaying endogenous fluctuations.