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Habits And Durability In Consumption And The Effects Of Exchange Rate Policies

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Author Info
ARMAN MANSOORIAN
SIMON NEAIME
Abstract

The effects of exchange rate policies are worked out in a model in which consumption goods are durable, and money enters the utility function. The interaction of habits and durability results in a non-monotonic adjustment of consumption expenditures, and the current account. As money does not exhibit durability, its dynamics are monotonic, and determined mainly by habits effects. Hence, an increase in the rate of depreciation of the domestic currency will very likely lead to a non-monotonic adjustment of consumption and the current account, while the adjustment of real money holdings will be monotonic. [F31, F32, F41]

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Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 16 (2002)
Issue (Month): 2 (June)
Pages: 97-114
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Handle: RePEc:taf:intecj:v:16:y:2002:i:2:p:97-114

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  1. Mansoorian, Arman, 1996. "On the Macroeconomic Policy Implications of Habit Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 119-29, February. [Downloadable!] (restricted)
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  4. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March. [Downloadable!] (restricted)
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  5. Obstfeld, Maurice, 1981. "Capital Mobility and Devaluation in an Optimizing Model with Rational Expectations," American Economic Review, American Economic Association, vol. 71(2), pages 217-21, May. [Downloadable!] (restricted)
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  6. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March. [Downloadable!] (restricted)
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  11. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October. [Downloadable!] (restricted)
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  12. Sen, Partha & Turnovsky, Stephen J, 1989. "Tariffs, Capital Accumulation, and the Current Account in a Small Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 811-31, November. [Downloadable!] (restricted)
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  13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  14. Djajic, Slobodan, 1982. "Balance-of-payments dynamics and exchange-rate management," Journal of International Money and Finance, Elsevier, vol. 1, pages 179-191, January. [Downloadable!] (restricted)
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