HABIT FORMATION AND GOVERNMENT SPENDING IN A SMALL OPEN ECONOMY
The paper studies the effects of an expansionary fiscal policy in a general equilibrium model of a small open economy. Households are assumed to possess habit-forming, endogenous rates of time preference. In response to fiscal shocks, the model generates cyclical endogenous persistence and procyclical time paths for consumption, employment, and investment, as well as a countercyclical path for the current account. Furthermore, fiscal shocks are shown to have positive long-run effects on output and negative long-run effects on consumption.
Key Words: Habit Formation; Fiscal Policy; General Equilibrium Model; Open Economy.
c1 Address correspondence to: Cem Karayalçin, Department of Economics, Florida International University, Miami, FL 33199, USA; e-mail: email@example.com.