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HABIT FORMATION IN AN INTERDEPENDENT WORLD ECONOMY

Published online by Cambridge University Press:  15 September 2009

Shinsuke Ikeda  and
Ichiro Gombi
Shinsuke Ikeda*
Affiliation:
Osaka University
Ichiro Gombi
Affiliation:
Ritsumeikan University
*
Address correspondence to: Shinsuke Ikeda, Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan; e-mail: [email protected].
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Abstract

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

Keywords

Habit FormationTwo-Country ModelImmiserizing Growth
Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 4 , September 2009 , pp. 477 - 492
Copyright
Copyright © Cambridge University Press 2009

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