Habit formation and fiscal transmission in open economies

Cardi, Olivier and Müller, Gernot (2011) Habit formation and fiscal transmission in open economies. Journal of International Economics, 85 (2). pp. 256-267. ISSN 0022-1996

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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. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.

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Journal Article
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Journal of International Economics
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10 Sep 2018 08:58
Last Modified:
22 Nov 2022 06:17