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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].
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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

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