Habits, costly investment, and current account dynamics

Ikeda, Shinsuke; Gombi, Ichiro

doi:10.1016/s0022-1996(98)00067-1

“…Similarly, adjacent and distant complementarities in country F are defined in terms of u * . In the case of the representative agent economy, the intertemporal complementarities displayed by consumers' preferences definitely determine the equilibrium dynamics (see, e.g., Ryder andHeal 1973 andGombi 1999). In contrast, when the economy consists of heterogeneous agents, as in the present case, pecuniary externalities through markets divert each agent's consumption saving behavior from what is predicted from each agent's own preference, as shown in the following section.…”

Section: The Modelmentioning

confidence: 66%

“…An important stylized fact is that consumers' habit forming behavior has a significant effect on intertemporal choices, and hence various macroeconomic phenomena (e.g., Campbell habit-persistent behavior to small-country models, Mansoorian (1993a, b) and Ikeda and Gombi (1999) derive its implications for current account dynamics and macroeconomic policies. Amongst others, Gruber (2002) provides empirical support to an "intertemporal current account model" with habit formation as explaining the actual current account behavior of the G-7 countries.…”

Section: Introductionmentioning

confidence: 99%

Habit Formation in an Interdependent World Economy

Ikeda

¹

,

Gombi

²

2009

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 1 We are grateful to Gregory Bauer, Leonald Cheng, Charles Johnston, Atsushi Kajii, Kazuo Mino, Akihisa Shibata, and the participants of the 7th International Meeting of the Society for Social Choice and Welfare (Osaka, Japan), the 79th WEAI Conference (Vancouver, Canada), the 57th IAEC meeting (Lisbon, Portugal), the JEA Spring meeting (Meiji-Gakuin University, Tokyo), and the seminars at Kyoto, Osaka, and Ritsumeikan Universities. We appreciate financial supports from Grants-in-Aid for Scientific Research (C No. 1553021) from the Japan Society for the Promotion of Science. Terms of use: Documents in2 Corresponding author: S. Ikeda, The Institute of Social and Economic Research, Osaka University, Mihogaoka, Ibaraki, Osaka 567-0047, Japan. Telephone: 81-6-6879-8568, Facsimile: 81-6-6878-2766, Email: . 3 I. Gombi, The Faculty of Economics, Ritsumeikan University, Kusatsu, Shiga 525-8577 Japan. Telephone: 81-77-561-4840, Email: . MSO-04-09-02Abstract Economic interdependence of heterogeneous habit forming consumers is examined by using a two-country model. Due to endogenous interest rate adjustments, consumption-habit dynamics in one country are affected by the other country's habits and preferences. To characterize the interactive dynamics, we construct an aggregate world felicity function from individual countries' felicity functions and introduce a global aggregate habit capital, defined as the sum of individual countries' habit capitals. External indebtedness depends crucially on international differences in habit-adjusted disposable income less habitual living standard. The international average of, and difference in, the strength of habit formation play a key role in macroeconomic adjustment and the effects of fiscal policies. An increase in fiscal spending in one country can make that country better off, and the neighbor worse off, due to intertemporal terms-of-trade effects. JEL Classification Numbers: F41, D90.

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“…As shown by Corollary 1(ii), an increase in country H's fiscal spending reduces or increases its own net foreign assets in steady states as its preferences exhibit adjacent or distant complementarity, as in the small-country case (e.g., Ikeda and Gombi 1999). The effect on the steady-state consumption level is somewhat in contrast to the small-country case, where an increase in g necessarily decreasesc.…”

Section: Consumption and Net Foreign Assetsmentioning

confidence: 88%

“…In the small-country case, consumption of the country plumps more or less than its disposable income as the preferences exhibit distant or adjacent complementarity (see, e.g., Ikeda and Gombi 1999). In the same way, (48) implies that dc (0) /dg ≷ −1 ⇔ Ω H ≷ 0: when country H's intertemporal preference exhibits adjacent (or distant) complementarity Ω H > 0 (or Ω H < 0), H's consumption does not plump (or plumps) more than its disposable income on impact.…”

Section: Consumption and Net Foreign Assetsmentioning

confidence: 99%

Habit Formation in an Interdependent World Economy

Ikeda

¹

,

Gombi

²

2004

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 1 We are grateful to Gregory Bauer, Leonald Cheng, Charles Johnston, Atsushi Kajii, Kazuo Mino, Akihisa Shibata, and the participants of the 7th International Meeting of the Society for Social Choice and Welfare (Osaka, Japan), the 79th WEAI Conference (Vancouver, Canada), the 57th IAEC meeting (Lisbon, Portugal), the JEA Spring meeting (Meiji-Gakuin University, Tokyo), and the seminars at Kyoto, Osaka, and Ritsumeikan Universities. We appreciate financial supports from Grants-in-Aid for Scientific Research (C No. 1553021) from the Japan Society for the Promotion of Science. Terms of use: Documents in2 Corresponding author: S. Ikeda, The Institute of Social and Economic Research, Osaka University, Mihogaoka, Ibaraki, Osaka 567-0047, Japan. Telephone: 81-6-6879-8568, Facsimile: 81-6-6878-2766, Email: . 3 I. Gombi, The Faculty of Economics, Ritsumeikan University, Kusatsu, Shiga 525-8577 Japan. Telephone: 81-77-561-4840, Email: . MSO-04-09-02Abstract Economic interdependence of heterogeneous habit forming consumers is examined by using a two-country model. Due to endogenous interest rate adjustments, consumption-habit dynamics in one country are affected by the other country's habits and preferences. To characterize the interactive dynamics, we construct an aggregate world felicity function from individual countries' felicity functions and introduce a global aggregate habit capital, defined as the sum of individual countries' habit capitals. External indebtedness depends crucially on international differences in habit-adjusted disposable income less habitual living standard. The international average of, and difference in, the strength of habit formation play a key role in macroeconomic adjustment and the effects of fiscal policies. An increase in fiscal spending in one country can make that country better off, and the neighbor worse off, due to intertemporal terms-of-trade effects. JEL Classification Numbers: F41, D90.

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“…However, without no exception, the existing models of con-sumption habits commonly rule out consumers' interactions due to pecuniary externalities: they focus on representative agent models (e.g., Ryder and Heal (1973) and Carrol et al (2000)) and/or small country models (Mansoorian (1993) and Ikeda and Gombi (1999)). When the interest rate is endogenously determined in heterogeneous consumer (or country) economies, one's consumption-habit behavior would be a¤ected by others' through interestrate adjustments.…”

Section: Introductionmentioning

confidence: 99%

Heterogeneous Habits and the Transfer Paradox

Gombi

¹

,

Ikeda

²

2002

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. By using a two-country model with habit-forming consumers, this paper shows that the transfer paradox can take place in the free-trade, dynamically-stable world economy. When the debtor is more habituated to consumption than the creditor, an income transfer from the creditor to the debtor raises the interest rate in transition through changes in time preference. With su¢ciently low elasticities of intertemporal substitution and/or su¢ciently large stock of the creditor's assets, the intertemporal terms of trade e¤ect immiserizes the recipient and enriches the donor. Although the transfer paradox occurs only when the international bond market is "unstable" with respect to an ad hoc Walrasian adjustment process, the equilibrium dynamics are stable in the usual sense: given that the economy is always in the rational expectation equilibrium, the transfer paradox generically occurs. JEL Classi…cation Numbers: F00, D90. Terms of use: Documents in EconStor may

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Habits, costly investment, and current account dynamics

Cited by 15 publications

References 33 publications

Habit Formation in an Interdependent World Economy

Habit Formation in an Interdependent World Economy

Habit Formation in an Interdependent World Economy

Heterogeneous Habits and the Transfer Paradox

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