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Habit Formation And Government Spending In A Small Open Economy

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  • Karayal in, Cem
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    Abstract

    The paper studies the effects of an expansionary fiscal policy in a general equilibrium model of a small open economy. Households are assumed to possess habit-forming, endogenous rates of time preference. In response to fiscal shocks, the model generates cyclical endogenous persistence and procyclical time paths for consumption, employment, and investment, as well as a countercyclical path for the current account. Furthermore, fiscal shocks are shown to have positive long-run effects on output and negative long-run effects on consumption.

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    File URL: http://journals.cambridge.org/abstract_S1365100502020059
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    Bibliographic Info

    Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

    Volume (Year): 7 (2003)
    Issue (Month): 03 (June)
    Pages: 407-423

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    Handle: RePEc:cup:macdyn:v:7:y:2003:i:03:p:407-423_02

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    Cited by:
    1. Olivier Cardi & Gernot J. Muller, 2010. "Habit Formation and Fiscal Transmission in Open Economies," Working Papers hal-00544484, HAL.
    2. Schubert, Stefan Franz, 2009. "Dynamic Effects of Oil Price Shocks and their Impact on the Current Account," MPRA Paper 16738, University Library of Munich, Germany.
    3. James M. Nason & Takashi Kano, 2004. "Business Cycle Implications of Habit Formation," Econometric Society 2004 Far Eastern Meetings 619, Econometric Society.

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