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Habit Persistence and International Comovements

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  • Alexandre Dmitriev
  • Ivo Krznar

Abstract

Two-country real business cycle models with time-separable preferences and complete markets predict that cross-country investment correlations are negative. The opposite is true in the data. Backus et al (1995) coined the term quantity anomaly for this phenomenon. This paper proposes to address this discrepancy by allowing the nonseparability of preferences over time. We incorporate internal habit formation in consumption. Our model predicts empirically plausible values of cross-country investment correlation without deteriorating other business cycle statistics. The results are robust to the degree of spillovers and persistence in the specification of productivity shocks.

Suggested Citation

  • Alexandre Dmitriev & Ivo Krznar, 2010. "Habit Persistence and International Comovements," Working Papers 23, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:wpaper:23
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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

    Keywords

    international real business cycles; time nonseparable preferences; habit persistence; investment comovements;
    All these keywords.

    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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