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HABIT PERSISTENCE AND INTERNATIONAL COMOVEMENTS

Published online by Cambridge University Press:  16 August 2011

Alexandre Dmitriev  and
Ivo Krznar
Alexandre Dmitriev*
Affiliation:
University of New South Wales
Ivo Krznar
Affiliation:
Croatian National Bank and Zagreb School of Economics and Management
*
Address correspondence to: Alexandre Dmitriev, School of Economics, Australian School of Business, The University of New South Wales, Sydney, NSW 2052, Australia; e-mail: a.dmitriev@unsw.edu.au.
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Abstract

Theoretically, two-country real business cycle models with time-separable preferences and complete markets predict that cross-country investment correlations will be negative. The opposite is true in the data. This phenomenon has been described by Backus et al. [in Cooley (ed.), Frontiers of Business Cycle Research, pp. 331–356 (Princeton, NJ: Princeton University Press, 1995)] as a quantity anomaly. This paper proposes to address this discrepancy by allowing the nonseparability of preferences over time. Here, we incorporate internal habit formation into consumption. Our model predicts the empirically plausible value of cross-country investment correlation without sacrificing other business cycle statistics. The results are robust to the degree of spillovers and persistence in the specification of the productivity shocks.

Keywords

International Real Business CyclesTime-Nonseparable PreferencesHabit PersistenceInvestment Comovements
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Supplement S3 , November 2012 , pp. 312 - 330
Copyright
Copyright © Cambridge University Press 2011

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