Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/92653
Authors: 
Ikeda, Shinsuke
Gombi, Ichiro
Year of Publication: 
2004
Series/Report no.: 
ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 619
Abstract: 
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.
Subjects: 
habit formation
two-country model
fiscal policy
JEL: 
F41
D90
Document Type: 
Working Paper

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