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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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  2. Tesar, L.L., 1988. "Savings, Investment And International Capital Flows," RCER Working Papers 154, University of Rochester - Center for Economic Research (RCER).
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Citations

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Cited by:
  1. Ichiro Gombi & Shinsuke Ikeda, 2001. "Heterogeneous Habits and the Transfer Paradox," ISER Discussion Paper 0551, Institute of Social and Economic Research, Osaka University.
  2. 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.
  3. 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.).
  4. 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.
  5. 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).
  6. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
  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. Ichiro Gombi & Shinsuke Ikeda, 2003. "Habit Formation And The Transfer Paradox," The Japanese Economic Review, Japanese Economic Association, vol. 54(4), pages 361-380.

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