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Habit Formation in an Interdependent World Economy

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  • Shinsuke Ikeda
  • Ichiro Gombi

Abstract

In a two-country world economy, consumption-habit dynamics in one country are affected, due to endogenous interest rate adjustments, by the other country's habits and preferences. External indebtedness depends crucially on international differences in habit-adjusted net output less habitual living standard. Interest rate adjustments enlarge the consumption impact of an income shock. Consistently with the empirical facts, the habit parameter of a large country, therefore, would be underestimated, and the current account volatility overestimated, if estimated using a small-country model. An increase in fiscal spending in one country can benefit the country and harm the neighbor due to intertemporal terms-of-trade effects.

Suggested Citation

  • Shinsuke Ikeda & Ichiro Gombi, 2004. "Habit Formation in an Interdependent World Economy," ISER Discussion Paper 0619, Institute of Social and Economic Research, Osaka University, revised Jul 2008.
  • Handle: RePEc:dpr:wpaper:0619
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    References listed on IDEAS

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    Cited by:

    1. Shinsuke Ikeda, 2009. "Export- and Import-Specific Habit Formation," Review of Development Economics, Wiley Blackwell, vol. 13(4), pages 709-718, November.
    2. repec:kap:jeczfn:v:122:y:2017:i:3:d:10.1007_s00712-017-0537-5 is not listed on IDEAS

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