International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition

Maurice Obstfeld

No 4094, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a simple diagrammatic analysis of an open economy's external adjustment process under habit-forming individual preferences. The exposition focuses on the consumption side and aims to make transparent the linkage among wealth, past consumption experience, and current consumption. An extension of the standard representative-agent model to a growing economy of overlapping generations completes the paper. Under habit formation an agent's consumption exhibits a form of hysteresis, in that his current consumption depends on his past consumption experience as well as initial assets. In the overlapping-generations model aggregate hysteresis disappears in the long run.

Date: 1992-06
Note: ITI
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Citations: View citations in EconPapers (14)

Published as Review of International Economics, Vol. 1, No. 1, pp. 32-48 (November 1992)

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Journal Article: International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition (1992)
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