IDEAS home Printed from https://ideas.repec.org/p/hnb/wpaper/23.html
   My bibliography  Save this paper

Habit Persistence and International Comovements

Author

Listed:
  • Alexandre Dmitriev
  • Ivo Krznar

Abstract

Two-country real business cycle models with time-separable preferences and complete markets predict that cross-country investment correlations are negative. The opposite is true in the data. Backus et al (1995) coined the term quantity anomaly for this phenomenon. This paper proposes to address this discrepancy by allowing the nonseparability of preferences over time. We incorporate internal habit formation in consumption. Our model predicts empirically plausible values of cross-country investment correlation without deteriorating other business cycle statistics. The results are robust to the degree of spillovers and persistence in the specification of productivity shocks.

Suggested Citation

  • Alexandre Dmitriev & Ivo Krznar, 2010. "Habit Persistence and International Comovements," Working Papers 23, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:wpaper:23
    as

    Download full text from publisher

    File URL: http://www.hnb.hr/repec/hnb/wpaper/pdf/w-023.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Heathcote, Jonathan & Perri, Fabrizio, 2002. "Financial autarky and international business cycles," Journal of Monetary Economics, Elsevier, vol. 49(3), pages 601-627, April.
    3. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864, Elsevier.
    4. Yossi Yakhin, 2007. "Staggered Wages, Financial Frictions, and the International Comovement Problem," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 148-171, January.
    5. Boileau, Martin & Normandin, Michel, 2008. "Closing international real business cycle models with restricted financial markets," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 733-756, September.
    6. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    7. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
    8. Ivo Krznar, 2008. "International Business Cycles with Frictions in Goods and Factors Markets," Working Papers 18, The Croatian National Bank, Croatia.
    9. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
    10. Unknown, 1999. "1999 Winter," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-12.
    11. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
    12. Unknown, 1999. "1999 Fall," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-11.
    13. Unknown, 1996. "1996 Spring," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-12.
    14. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
    15. ., 2008. "Trade Liberalisation and International Inequality," Chapters, in: Trade Liberalisation and The Poverty of Nations, chapter 3, Edward Elgar Publishing.
    16. Unknown, 1999. "1999 Spring," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-17.
    17. Grishchenko, Olesya V., 2010. "Internal vs. external habit formation: The relative importance for asset pricing," Journal of Economics and Business, Elsevier, vol. 62(3), pages 176-194, May.
    18. Jean-Olivier Hairault, 2002. "Labor-Market Search and International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 535-558, July.
    19. Finn E. Kydland (ed.), 1995. "Business Cycle Theory," Books, Edward Elgar Publishing, number 565.
    20. Unknown, 1996. "1996 Fall," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-12.
    21. Unknown, 1996. "1996 Winter," CWAE Newsletter, Agricultural and Applied Economics Association, Committee on Women in Agricultural Economics (CWAE), pages 1-12.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sutherland, Alan & Küçük, Hande, 2015. "International Risk Sharing and Portfolio Choice with Non-separable Preferences," CEPR Discussion Papers 10724, C.E.P.R. Discussion Papers.
    2. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
    3. Keisuke Otsu, 2009. "International Business Cycle Accounting," IMES Discussion Paper Series 09-E-29, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Phillips, Kerk L., 2015. "How non-traded goods may generate quasi-quadratic costs for capital adjustment," Economics Letters, Elsevier, vol. 127(C), pages 24-26.
    5. Dmitriev, Alexandre, 2017. "Composite habits and international transmission of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 1-34.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
    2. Yi Wen, 2005. "By force of demand: explaining international comovements and the saving-investment correlation puzzle," Working Papers 2005-043, Federal Reserve Bank of St. Louis.
    3. Wen, Yi, 2007. "By force of demand: Explaining international comovements," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 1-23, January.
    4. Johri, Alok & Letendre, Marc-André & Luo, Daqing, 2011. "Organizational capital and the international co-movement of investment," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 511-523.
    5. Evans, Martin D.D. & Hnatkovska, Viktoria V., 2014. "International capital flows, returns and world financial integration," Journal of International Economics, Elsevier, vol. 92(1), pages 14-33.
    6. Dmitriev, Alexandre, 2017. "Composite habits and international transmission of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 1-34.
    7. Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.
    8. Guo, Zi-Yi, 2017. "International Real Business Cycle Models with Incomplete Information," EconStor Preprints 168432, ZBW - Leibniz Information Centre for Economics.
    9. Boileau, Martin & Normandin, Michel, 2008. "Closing international real business cycle models with restricted financial markets," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 733-756, September.
    10. Ivan Jaccard & Frank Smets, 2020. "Structural Asymmetries and Financial Imbalances in the Eurozone," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 36, pages 73-102, April.
    11. Douch, Mohamed & Bouaddi, Mohammed, 2010. "EQUITY Premium Puzzle in a Data-Rich Environment," MPRA Paper 29440, University Library of Munich, Germany.
    12. Otrok, Christopher & Ravikumar, B. & Whiteman, Charles H., 2002. "Habit formation: a resolution of the equity premium puzzle?," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1261-1288, September.
    13. Sanglim Lee, 2012. "Expected Currency Excess Returns and International Business Cycles," Working papers 2012-16, University of Connecticut, Department of Economics.
    14. James M. Nason & Takashi Kano, 2004. "Business Cycle Implications of Habit Formation," Computing in Economics and Finance 2004 175, Society for Computational Economics.
    15. Xiaohong Chen & Sydney C. Ludvigson, 2009. "Land of addicts? an empirical investigation of habit-based asset pricing models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(7), pages 1057-1093.
    16. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    17. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1995. "Asset Pricing Lessons for Modeling Business Cycles," NBER Working Papers 5262, National Bureau of Economic Research, Inc.
    18. M. Fatih Guvenen, 2003. "A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?," RCER Working Papers 499, University of Rochester - Center for Economic Research (RCER).
    19. Josep Pijoan-Mas, 2007. "Pricing Risk in Economies with Heterogeneous Agents and Incomplete Markets," Journal of the European Economic Association, MIT Press, vol. 5(5), pages 987-1015, September.
    20. Leibovici, Fernando & Waugh, Michael E., 2019. "International trade and intertemporal substitution," Journal of International Economics, Elsevier, vol. 117(C), pages 158-174.

    More about this item

    Keywords

    international real business cycles; time nonseparable preferences; habit persistence; investment comovements;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hnb:wpaper:23. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Romana Sinković (email available below). General contact details of provider: https://www.hnb.hr .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.