Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Habit formation and fiscal transmission in open economies
AU - Cardi, Olivier
AU - Müller, Gernot
PY - 2011/11
Y1 - 2011/11
N2 - In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.
AB - In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.
KW - Investment
KW - Current account
KW - Habit formation
KW - Fiscal policy
U2 - 10.1016/j.jinteco.2011.07.007
DO - 10.1016/j.jinteco.2011.07.007
M3 - Journal article
VL - 85
SP - 256
EP - 267
JO - Journal of International Economics
JF - Journal of International Economics
SN - 0022-1996
IS - 2
ER -