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Export‐ and Import‐Specific Habit Formation
Author(s) -
Ikeda Shinsuke
Publication year - 2009
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2009.00525.x
Subject(s) - economics , complementarity (molecular biology) , habit , shock (circulatory) , net foreign assets , consumption (sociology) , monetary economics , international economics , international trade , current account , exchange rate , social science , genetics , medicine , psychology , sociology , psychotherapist , biology
By incorporating good‐specific habit formation into the consumption of export and import goods, I examine the dynamic adjustment of a small country to a permanent terms‐of‐trade deterioration. With differences in the strength of habit formation between export and import goods, the shock affects net output through countervailing income and substitution effects. Unlike in the existing literature, adjacent complementarity is neither necessary nor sufficient for the shock to reduce net foreign assets. When consuming export goods is more habit forming than is consuming import goods, the resulting asymmetric inertia of exports and imports leads the current account to exhibit a J‐curve.