Habit formation and fiscal transmission in open economies
AbstractIn this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 85 (2011)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/505552
Investment; Current account; Habit formation; Fiscal policy;
Other versions of this item:
- Olivier Cardi & Gernot J. Muller, 2010. "Habit Formation and Fiscal Transmission in Open Economies," Working Papers hal-00544484, HAL.
- Cardi, Olivier & Müller, Gernot, 2010. "Habit Formation and Fiscal Transmission in Open Economies," CEPR Discussion Papers 8035, C.E.P.R. Discussion Papers.
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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