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Habit Persistence And International Comovements

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  • Dmitriev, Alexandre
  • Krznar, Ivo

Abstract

Theoretically, two-country real business cycle models with time-separable preferences and complete markets predict that cross-country investment correlations will be negative. The opposite is true in the data. This phenomenon has been described by Backus et al. [in Cooley (ed.), Frontiers of Business Cycle Research, pp. 331–356 (Princeton, NJ: Princeton University Press, 1995)] as a quantity anomaly. This paper proposes to address this discrepancy by allowing the nonseparability of preferences over time. Here, we incorporate internal habit formation into consumption. Our model predicts the empirically plausible value of cross-country investment correlation without sacrificing other business cycle statistics. The results are robust to the degree of spillovers and persistence in the specification of the productivity shocks.

Suggested Citation

  • Dmitriev, Alexandre & Krznar, Ivo, 2012. "Habit Persistence And International Comovements," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S3), pages 312-330, November.
    • Handle: RePEc:cup:macdyn:v:16:y:2012:i:s3:p:312-330_00
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    Cited by:

    1. Hande Kucuk & Alan Sutherland, 2015. "International Risk Sharing and Portfolio Choice with Non-separable Preferences," Working Papers 1517, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Phillips, Kerk L., 2015. "How non-traded goods may generate quasi-quadratic costs for capital adjustment," Economics Letters, Elsevier, vol. 127(C), pages 24-26.
    3. Dmitriev, Alexandre & Roberts, Ivan, 2012. "International business cycles with complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 36(6), pages 862-875.
    4. Keisuke Otsu, 2009. "International Business Cycle Accounting," IMES Discussion Paper Series 09-E-29, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Dmitriev, Alexandre, 2017. "Composite habits and international transmission of business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 1-34.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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