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Export- and Import-Specific Habit Formation

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  • Shinsuke Ikeda

Abstract

By incorporating good-specific habit formation into the consumption of export and import goods, I examine the dynamic adjustment of a small country to a permanent terms-of-trade deterioration. With differences in the strength of habit formation between export and import goods, the shock affects net output through countervailing income and substitution effects. Unlike in the existing literature, adjacent complementarity is neither necessary nor sufficient for the shock to reduce net foreign assets. When consuming export goods is more habit forming than is consuming import goods, the resulting asymmetric inertia of exports and imports leads the current account to exhibit a J-curve. Copyright © 2009 Blackwell Publishing Ltd.

Suggested Citation

  • Shinsuke Ikeda, 2009. "Export- and Import-Specific Habit Formation," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 709-718, November.
  • Handle: RePEc:bla:rdevec:v:13:y:2009:i:4:p:709-718
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    References listed on IDEAS

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