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Habit Persistence and Welfare Gains from International Asset Trade

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  • Egil Matsen

    (Department of Economics, Norwegian University of Science and Technology)

Abstract

We introduce habit formation in a model that studies the link between international trade in financial assets, economic growth, and welfare. As with time separable preferences asset trade increases the mean growth rate, but it also increases growth-volatility. We demonstrate that the welfare gain from asset trade is lower with habit persistence in consumption. This reflects that the habit-forming households perceive the higher growth-volatility as a higher cost to obtain increased average growth. Calibrating the model to data for North America and Western Europe, we find that habit persistence lowers welfare gains of financial integration by about 40-50 %.

Suggested Citation

  • Egil Matsen, 2001. "Habit Persistence and Welfare Gains from International Asset Trade," Working Paper Series 0102, Department of Economics, Norwegian University of Science and Technology.
  • Handle: RePEc:nst:samfok:0102
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    References listed on IDEAS

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    More about this item

    Keywords

    Habit formation; financial integration; growth; welfare;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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