TY - JOUR
T1 - Composite habits and international transmission of business cycles
AU - Dmitriev, Alexandre
PY - 2017
Y1 - 2017
N2 - 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".
AB - 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".
U2 - 10.1016/j.jedc.2016.12.003
DO - 10.1016/j.jedc.2016.12.003
M3 - Article
SN - 0165-1889
VL - 76
SP - 1
EP - 34
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -