Habit Formation in an Interdependent World Economy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 1 We are grateful to Gregory Bauer, Leonald Cheng, Charles Johnston, Atsushi Kajii, Kazuo Mino, Akihisa Shibata, and the participants of the 7th International Meeting of the Society for Social Choice and Welfare (Osaka, Japan), the 79th WEAI Conference (Vancouver, Canada), the 57th IAEC meeting (Lisbon, Portugal), the JEA Spring meeting (Meiji-Gakuin University, Tokyo), and the seminars at Kyoto, Osaka, and Ritsumeikan Universities. We appreciate financial supports from Grants-in-Aid for Scientific Research (C No. 1553021) from the Japan Society for the Promotion of Science. Terms of use: Documents in2 Corresponding author: S. Ikeda, The Institute of Social and Economic Research, Osaka University, Mihogaoka, Ibaraki, Osaka 567-0047, Japan. Telephone: 81-6-6879-8568, Facsimile: 81-6-6878-2766, Email: <ikeda@iser.osaka-u.ac.jp>. 3 I. Gombi, The Faculty of Economics, Ritsumeikan University, Kusatsu, Shiga 525-8577 Japan. Telephone: 81-77-561-4840, Email: <gombi@ec.ritsumei.ac.jp>. MSO-04-09-02Abstract Economic interdependence of heterogeneous habit forming consumers is examined by using a two-country model. Due to endogenous interest rate adjustments, consumption-habit dynamics in one country are affected by the other country's habits and preferences. To characterize the interactive dynamics, we construct an aggregate world felicity function from individual countries' felicity functions and introduce a global aggregate habit capital, defined as the sum of individual countries' habit capitals. External indebtedness depends crucially on international differences in habit-adjusted disposable income less habitual living standard. The international average of, and difference in, the strength of habit formation play a key role in macroeconomic adjustment and the effects of fiscal policies. An increase in fiscal spending in one country can make that country better off, and the neighbor worse off, due to intertemporal terms-of-trade effects. JEL Classification Numbers: F41, D90.

Export‐ and Import‐Specific Habit Formation

“…Extending the existing multigood models by specifying habits on a good‐by‐good basis will contribute to producing richer implications for various issues in the multigood context. It would also be interesting to extend the export‐ and import‐specific habit model to a large‐country model as developed by Ikeda and Gombi (2009).…”