International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition

41 Pages Posted: 9 Feb 2007 Last revised: 12 Sep 2010

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: June 1992

Abstract

This paper presents a simple diagrammatic analysis of an open economy's external adjustment process under habit-forming individual preferences. The exposition focuses on the consumption side and aims to make transparent the linkage among wealth, past consumption experience, and current consumption. An extension of the standard representative-agent model to a growing economy of overlapping generations completes the paper. Under habit formation an agent's consumption exhibits a form of hysteresis, in that his current consumption depends on his past consumption experience as well as initial assets. In the overlapping-generations model aggregate hysteresis disappears in the long run.

Suggested Citation

Obstfeld, Maurice, International Adjustment with Habit-Forming Consumption: A Diagrammatic Exposition (June 1992). NBER Working Paper No. w4094. Available at SSRN: https://ssrn.com/abstract=476186

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