Hostname: page-component-cd9895bd7-lnqnp Total loading time: 0 Render date: 2024-12-28T18:19:38.187Z Has data issue: false hasContentIssue false
  • English
  • Français

SAVINGS, INVESTMENT, EMPLOYMENT, AND INFLATION IN A SMALL OPEN ECONOMY WITH HABIT PERSISTENCE

Published online by Cambridge University Press:  23 April 2010

Arman Mansoorian ,
Leo Michelis  and
Mohammed Mohsin
Arman Mansoorian*
Affiliation:
York University
Leo Michelis
Affiliation:
Ryerson University
Mohammed Mohsin
Affiliation:
University of Tennessee
*
Address correspondence to: Arman Mansoorian, Department of Economics, York University, 4700 Keele Street, Toronto, Ontario M3J 1P3, Canada; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.

Keywords

SavingsInvestmentInflationHabits
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 3 , June 2010 , pp. 365 - 387
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Backus, David K. and Driffill, John (1985) Inflation and reputation. American Economic Review 75 (June), 530–538.Google Scholar
Backus, David K., Gregory, Allen W., and Telmer, Chris I. (1993) Accounting for forward rates in markets for foreign currency. Journal of Finance 48, 1887–1908.Google Scholar
Backus, David K., Kehoe, Patrick J., and Kydland, Finn E. (1994) Dynamics of the trade balance and the terms of trade: The J-curve? American Economic Review 84, 84–103.Google Scholar
Barro, Robert (1996) Inflation and growth. Federal Reserve Bank of St. Louis Review 78 (3)(May/June), 153–169.Google Scholar
Baxter, Marianne and Crucini, Mario J. (1993) Explaining savings–investment correlations. American Economic Review 83, 416–436.Google Scholar
Blanchard, Olivier (1985) Debts, deficits, and finite horizons. Journal of Political Economy 93, 223–247.Google Scholar
Bullard, James and Keating, John W. (1995) The long-run relationship between inflation and output in postwar economies. Journal of Monetary Economics 36, 477–496.Google Scholar
Cardia, Emanuela (1991) The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks. Journal of Monetary Economics 28, 411–434.Google Scholar
Carroll, Christopher D., Overland, Jody, and Weil, David N. (2000) Saving and growth with habit formation. American Economic Review 90, 341–355.Google Scholar
Constantinides, George M. (1990) Habit formation: A resolution of the equity premium puzzle. Journal of Political Economy 98 (3), 519–543.Google Scholar
Cooley, Thomas F. (1995) Frontiers of Business Cycle Research. Princeton, NJ: Princeton University Press.Google Scholar
Cooley, Thomas F. and Hansen, Gary D. (1989) The inflation tax in a real business cycle model. American Economic Review 79 (4), 733–748.Google Scholar
Feldstein, Martin, and Horioka, Charles (1980) Domestic saving and international capital flows. Economic Journal 90, 314–329.Google Scholar
Ferson, Wayne E. and Constantinides, George M. (1991) Habit persistence and durability in aggregate consumption: Empirical tests. Journal of Financial Economics 29, 199–240.Google Scholar
Finn, Mary (1990) On savings and investment dynamics in a small open economy. Journal of International Economics 29, 1–21.CrossRefGoogle Scholar
Fischer, Stanley (1979) Capital accumulation on the transition path in a monetary optimizing model. Econometrica 47, 1433–1439.Google Scholar
Fischer, Stanley (1993) The role of macroeconomic factors in growth. Journal of Monetary Economics 32 (3), 485–512.Google Scholar
Fuhrer, Jeffrey C. and Klein, Michael (1998) Risky Habits: On Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations. Working paper 6735, National Bureau of Economic Research.Google Scholar
Haug, Alfred (1996) Blanchard's model of consumption: An empirical study. Journal of Business and Economics Statistics 14, 169–177.Google Scholar
Heaton, John (1993) The interaction between time non-separable preferences and time aggregation. Econometrica 61, 353–385.Google Scholar
Ikeda, Shinsuke and Gombi, Ichiro (1998) Habits, costly investment, and current account dynamics. Journal of International Economics 49, 363–384.Google Scholar
Kydland, Finn and Prescott, Edward (1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85, 473–492.Google Scholar
Lanne, Markku, Lütkepohl, Helmut, and Saikkonen, Pentti (2002) Comparison of unit root tests for time series with level shifts. Journal of Time Series Analysis 21 (6), 667–685.Google Scholar
Mansoorian, Arman (1996) On the macroeconomic policy implications of habit persistence. Journal of Money, Credit, and Banking 28, 119–129.Google Scholar
Mansoorian, Arman and Mohsin, Mohammed (2006) On the employment, investment and current account effects of inflation in a cash-in-advance economy. Journal of International Economics 70, 296–313.Google Scholar
Mehra, Rajnish and Prescott, Edward C. (1985) The equity premium: A puzzle. Journal of Monetary Economics 15, 145–161.CrossRefGoogle Scholar
Mendoza, Enrique (1991) Real business cycles in a small open economy. American Economic Review 82, 797–818.Google Scholar
Mishkin, Frederic S. (2000) Inflation targeting in emerging-market countries. American Economic Review Papers and Proceedings 90, 105–109.Google Scholar
Naik, Narayan and Moore, Michael (1996) Habit formation and intertemporal substitution in individual food consumption. Review of Economics and Statistics 78, 321–328.CrossRefGoogle Scholar
Ryder, Harl E. and Heal, Geoffrey M. (1973) Optimal growth with intertemporally dependent preferences. Review of Economic Studies 40, 1–31.Google Scholar
Saikkonen, Pentti and Lütkepohl, Helmut (2002) Testing for a unit root in a time series with a level shift at unknown time. Econometric Theory 18, 313–348.CrossRefGoogle Scholar
Sen, Partha and Turnovsky, Stephen J. (1989a) Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen–Metzler effect. Journal of International Economics 26, 227–250.Google Scholar
Sen, Partha and Turnovsky, Stephen J. (1989b) Tariffs, capital accumulation and the current account in a small open economy. International Economic Review 30, 811–831.Google Scholar
Stockman, Alan C. (1981) Anticipated unflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8, 387–393.Google Scholar
Uzawa, Hirofumi (1968) Time preference, the consumption function, and optimal asset holdings. In Wolfe, J.N. (ed.), Value, Capital and Growth: Papers in Honour of Sir John Hicks. Chicago: Aldine.Google Scholar
Walsh, Carl E. (1995) Optimal contracts for central bankers. American Economic Review 85, 150–167.Google Scholar