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Composite habits and international transmission of business cycles

Dmitriev, Alexandre


This paper shows how internal habit formation defined over a composite of consumption and leisure can bring a two-country business cycle model closer to the data. Conditional on productivity shocks, our model reconciles with the data by closing the gap between cross-country correlations of consumption and output. It also predicts positive international correlations of investment and employment of the magnitude observed in the data. In other words, a rather parsimonious departure from a...[Show more]

CollectionsANU Research Publications
Date published: 2017
Type: Journal article
Source: Journal of Economic Dynamics and Control
DOI: 10.1016/j.jedc.2016.12.003


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