Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect

Takashi Kano

No CIRJE-F-572, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: A recent paper claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations.

Pages: 36 pages
Date: 2008-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
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Related works:
Journal Article: Habit formation and the present-value model of the current account: Yet another suspect (2009)
Working Paper: Habit Formation and the Present-Value Model of the Current Account: Yet Another Suspect (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2008cf572

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