Composite habits and international transmission of business cycles

Alexandre Dmitriev

    Research output: Contribution to journalArticle

    Abstract

    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".
    Original languageEnglish
    Pages (from-to)1-34
    JournalJournal of Economic Dynamics and Control
    Volume76
    DOIs
    Publication statusPublished - 2017

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