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 %.
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Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number
0102.
Length: 29 pages Date of creation: 01 Jul 2001 Date of revision: Publication status: Forthcoming in Journal of International Money and Finance Handle: RePEc:nst:samfok:0102
Find related papers by 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
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Devereux, Michael B & Smith, Gregor W, 1994.
"International Risk Sharing and Economic Growth,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 535-50, August.
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