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Savings, Investment, Employment, And Inflation In A Small Open Economy With Habit Persistence

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  • Mansoorian, Arman
  • Michelis, Leo
  • Mohsin, Mohammed

Abstract

The effects of inflation are studied for a small open economy with a cash-in-advance constraint on consumption in which the representative agent has preferences with habit persistence. An increase in the inflation rate requires a fall in the steady state living standards. On impact, to maintain living standards, the representative agent reduces his savings and labor supply. Investment falls and the current account turns into a deficit. In support of this model, we provide evidence from eight high-inflation countries suggesting that after an increase in the inflation rate, output and investment fall, and the net foreign asset position deteriorates over time.

Suggested Citation

  • Mansoorian, Arman & Michelis, Leo & Mohsin, Mohammed, 2010. "Savings, Investment, Employment, And Inflation In A Small Open Economy With Habit Persistence," Macroeconomic Dynamics, Cambridge University Press, vol. 14(3), pages 365-387, June.
    • Handle: RePEc:cup:macdyn:v:14:y:2010:i:03:p:365-387_09
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    Cited by:

    1. Hamdar, Bassam & Nouayhid, Samer, 2017. "Remittances And Foreign Aid As Sources Of External Development Finance: Impacts On Savings And Investment In Post-War Lebanon," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 70(1), pages 47-72.

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