Habit Formation and Fiscal Transmission in Open Economies

Müller, Gernot and Olivier Cardi
Authors registered in the RePEc Author Service: Gernot J. Müller

No 8035, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. In a first step, we identify government spending shocks within a vector autoregression model. We find that i) government spending increases output and induces a simultaneous decline of investment and the current account, but does not affect consumption; ii) the responses of output and investment are smaller in more open economies, while current account deficits tend to be larger. We find the predictions of the model to be broadly in line with the evidence, once we allow for habit formation in consumption. Specifically, habits are crucial for government spending to induce a simultaneous decline in investment and the current account.

Keywords: Current account; Fiscal policy; Habit formation; investment (search for similar items in EconPapers)
JEL-codes: E32 E62 F41 (search for similar items in EconPapers)
Date: 2010-10
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Habit formation and fiscal transmission in open economies (2011)
Working Paper: Habit Formation and Fiscal Transmission in Open Economies (2010)
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