International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition
This paper presents a simple diagrammatic analysis of an open economy's external adjustment process under habit-forming individual preferences. The exposition focuses on the consumption side and aims to make transparent the linkage among wealth, past consumption experience, and current consumption. An extension of the standard representative-agent model to a growing economy of overlapping generations completes the paper. Under habit formation an agent's consumption exhibits a form of hysteresis, in that his current consumption depends on his past consumption experience as well as initial assets. In the overlapping-generations model aggregate hysteresis disappears in the long run.
|Date of creation:||Jun 1992|
|Date of revision:|
|Publication status:||published as Review of International Economics, Vol. 1, No. 1, pp. 32-48 (November 1992)|
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