Composite habits and international transmission of business cycles
Alexandre Dmitriev ()
Journal of Economic Dynamics and Control, 2017, vol. 76, issue C, 1-34
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)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:76:y:2017:i:c:p:1-34
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