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Habits, costly investment, and current account dynamics

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  • Ikeda, Shinsuke
  • Gombi, Ichiro

Abstract

Using a small country model with habit-forming consumers and costly investment, we analyze equilibrium dynamics of the economy and derive empirical and welfare implications. The model can mimic some stylized facts: (i) a temporary increase in fiscal spending always deteriorates the current account whereas a permanent increase in fiscal spending may have a weaker effect; (ii) permanent productivity shocks deteriorate the current account; and (iii) savings and investment tend to co-move upon macroeconomic shocks. Strong habit persistence causes sluggishness in welfare dynamics. Consequently, a beneficial fiscal policy may have a harmful hangover effect on the future welfare.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 49 (1999)
Issue (Month): 2 (December)
Pages: 363-384

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Handle: RePEc:eee:inecon:v:49:y:1999:i:2:p:363-384

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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Citations

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Cited by:
  1. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
  2. Joseph W. Gruber, 2002. "Productivity shocks, habits, and the current account," International Finance Discussion Papers 733, Board of Governors of the Federal Reserve System (U.S.).
  3. Ichiro Gombi & Shinsuke Ikeda, 2001. "Heterogeneous Habits and the Transfer Paradox," ISER Discussion Paper 0551, Institute of Social and Economic Research, Osaka University.
  4. Ichiro Gombi & Shinsuke Ikeda, 2003. "Habit Formation And The Transfer Paradox," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 361-380.
  5. Shinsuke Ikeda & Ichiro Gombi, 2004. "Habit Formation in an Interdependent World Economy," ISER Discussion Paper 0619, Institute of Social and Economic Research, Osaka University, revised Jul 2008.
  6. 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.
  7. Huseyin Kalyoncu & Naveed Naqvi & Christopher Tsoukis, 2004. "Industrial Production and the Current Account: Theory and Panel Data Evidence from the OECD," Money Macro and Finance (MMF) Research Group Conference 2004 72, Money Macro and Finance Research Group.
  8. CARDI, Oliver & BERTINELLI, Luisito, 2004. "A formal model of krugman’s intuition on the J-curve," CORE Discussion Papers 2004043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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