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Capital utilization and habit formation in a small open economy model

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  • Marc-André Letendre

Abstract

This paper shows the effects of endogenous capital utilization and habit formation in consumption on the predictions of a small open economy model calibrated to Canada. Capital utilization improves the fit of the model by increasing the volatility of output, investment, and hours worked, while habit formation improves the fit of the model by improving the dynamic properties of consumption and the current account. It is also shown that while shocks to the world interest rate sometimes improve the fit of the baseline model, they do not improve the fit of the model with capital utilization and habit formation.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 3 (August)
Pages: 721-741

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Handle: RePEc:cje:issued:v:37:y:2004:i:3:p:721-741

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Cited by:
  1. Alexandre Dmitriev & Ivan Roberts, 2013. "International Business Cycles with Complete Markets," RBA Research Discussion Papers rdp2013-08, Reserve Bank of Australia.
  2. Douch, Mohamed, 2004. "Equity Premiums In Small Open Economy," MPRA Paper 14613, University Library of Munich, Germany.
  3. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée.
  4. Monteiro, Goncalo & Cook, Adam & Dey, Sanjoy, 2013. "Optimal tax policy under habit formation and capital utilization," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 230-248.
  5. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 283-298, November.
  6. Michel Normandin & Martin Boileau, 2004. "The Current Account and the Interest Differential In Canada," Cahiers de recherche 04-09, HEC Montréal, Institut d'économie appliquée.
  7. Zuzana Janko, 2008. "Reexamination of Real Business Cycles in A Small Open Economy," Working Papers 2008-15, Department of Economics, University of Calgary, revised 11 Jan 2008.
  8. James M. Nason & Takashi Kano, 2004. "Business Cycle Implications of Habit Formation," Computing in Economics and Finance 2004 175, Society for Computational Economics.
  9. Zhao, Yan, 2011. "Borrowing constraints and the trade balance-output comovement," MPRA Paper 36902, University Library of Munich, Germany.

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