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Composite habits and international transmission of business cycles

Alexandre Dmitriev ()

Journal of Economic Dynamics and Control, 2017, vol. 76, issue C, 1-34

Abstract: This paper shows how internal habit formation defined over a composite of consumption and leisure can bring a two-country business cycle model closer to the data. Conditional on productivity shocks, our model reconciles with the data by closing the gap between cross-country correlations of consumption and output. It also predicts positive international correlations of investment and employment of the magnitude observed in the data. In other words, a rather parsimonious departure from a canonical two-country, two-good model goes a long way toward addressing two long-standing puzzles: the “quantity anomaly” and the “international comovement puzzle”.

Keywords: Quantity anomaly; International comovement puzzle; Composite habits; Wealth effects (search for similar items in EconPapers)
JEL-codes: E32 F41 G15 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jedc.2016.12.003

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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