Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-26T15:16:17.208Z Has data issue: false hasContentIssue false
  • English
  • Français

HABIT FORMATION IN AN INTERDEPENDENT WORLD ECONOMY

Published online by Cambridge University Press:  15 September 2009

Shinsuke Ikeda  and
Ichiro Gombi
Shinsuke Ikeda*
Affiliation:
Osaka University
Ichiro Gombi
Affiliation:
Ritsumeikan University
*
Address correspondence to: Shinsuke Ikeda, Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan; e-mail: ikeda@iser.osaka-u.ac.jp.
Get access Rights & Permissions [Opens in a new window]

Abstract

In a two-country world economy, endogenous interest rate adjustment makes one country's consumption-habit dynamics affected by the other country's habit. External indebtedness depends crucially on international differences in habit-adjusted net output less habitual living standard. Interest rate adjustment enlarges the consumption impact of an income shock. Consistent with the empirical facts, the habit parameter of a large country would thus be underestimated, and the current account volatility overestimated, if they were estimated using a small-country model. An increase in fiscal spending in one country can benefit the country and harm the neighbor one due to reversed intertemporal terms-of-trade effects.

Keywords

Habit FormationTwo-Country ModelImmiserizing Growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 4 , September 2009 , pp. 477 - 492
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Bhagwati, Jagdish (1958) Immiserizing growth: A geometrical note. Review of Economic Studies 25, 201–205.CrossRefGoogle Scholar
Bianconi, Marcelo (2003) Fiscal policy and the terms of trade in an analytical two-country dynamic model. International Tax and Public Finance 10, 25–41.CrossRefGoogle Scholar
Bianconi, Marcelo and Turnovsky, Stephen J. (1997) International effects of government expenditure in interdependent economies. Canadian Journal of Economics 30, 57–84.CrossRefGoogle Scholar
Blanchard, Olivier J. and Fischer, Stanley (1989) Lectures on Macroeconomics. Cambridge, MA: MIT Press.Google Scholar
Cardi, Olivier (2007) Another view of the J-curve. Macroeconomic Dynamics 11, 153–174.CrossRefGoogle Scholar
Constantinides, George (1990) Habit formation: A resolution of the equity premium puzzle. Journal of Political Economy 98, 519–543.CrossRefGoogle Scholar
Devereux, Michael B. and Shi, Shouyong (1991) Capital accumulation and the current account in a two-country model. Journal of International Economics 30, 1–25.CrossRefGoogle Scholar
Díaz, Antonia, Pijoan-Mas, Josep, and Ríos-Rull, José-Victor (2003) Precautionary savings and wealth distribution under habit formation preferences. Journal of Monetary Economics 50, 1257–1291.CrossRefGoogle Scholar
Ferson, Wayne E. and Constantinides, George M. (1991) Habit persistence and durability in aggregate consumption: Empirical tests. Journal of Financial Economics 29, 199–240.CrossRefGoogle Scholar
Fisher, Walter H. and Hof, Franz X. (2005) Status seeking in the small open economy. Journal of Macroeconomics 27, 209–232.CrossRefGoogle Scholar
Frenkel, Jacob A. and Razin, Assaf (1996) Fiscal Policies and Growth in the World Economy, 3rd ed.Cambridge, MA: MIT Press.Google Scholar
Gombi, Ichiro and Ikeda, Shinsuke (2003) Habit formation and the transfer paradox. Japanese Economic Review 54, 361–380.CrossRefGoogle Scholar
Gruber, Joseph W. (2004) A present value test of habits and the current account. Journal of Monetary Economics 51, 1495–1507.CrossRefGoogle Scholar
Ikeda, Shinsuke and Gombi, Ichiro (1999) Habits, costly investment, and current account dynamics. Journal of International Economics 49, 363–384.CrossRefGoogle Scholar
Ikeda, Shinsuke and Gombi, Ichiro (2008) Habit Formation in an Interdependent World Economy. ISER Discussion Paper No. 619, Osaka University.Google Scholar
Ikeda, Shinsuke and Ono, Yoshiyasu (1991) Macroeconomic dynamics in a multi-country economy: A dynamic maximization approach. International Economic Review 33, 629–644.CrossRefGoogle Scholar
Karayalcin, Cem (1996) Stock markets, adjustment costs and the international transmission of shocks. Economica 63, 599–610.CrossRefGoogle Scholar
Mansoorian, Arman (1993a) Habit persistence and the Harberger-Laursen-Metzler effect in an infinite horizon model. Journal of International Economics 34, 153–166.CrossRefGoogle Scholar
Mansoorian, Arman (1993b) Tariffs, habit persistence, and the current account. Canadian Journal of Economics 26, 194–207.CrossRefGoogle Scholar
Ryder, Harl E. Jr. and Heal, Geoffrey M. (1973) Optimal growth with intertemporally dependent preference. Review of Economic Studies 40, 1–33.CrossRefGoogle Scholar
Svensson, Lars E.O. and Razin, Assaf (1983) The terms of trade and the current account: The Harberger-Laursen-Metzler effect. Journal of Political Economy 91, 97–125.Google Scholar
Turnovsky, Stephen J. and Bianconi, Marcelo (1992) The international transmission of tax policies in a dynamic world economy. Review of International Economics 1, 49–72.CrossRefGoogle Scholar