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Article
Habit persistence and welfare gains from international asset trade
Journal of International Money and Finance (2003)
  • Egil Matsen
Abstract
We introduce habit formation in a model that studies the link between international trade in financial assets, economic growth, and welfare. As with time separable preferences, asset trade increases the mean growth rate, but it also increases growth-volatility. We demonstrate that the welfare gain from asset trade is lower with habit persistence in consumption. This reflects that the habit-forming households perceive the higher growth-volatility as a higher cost to obtain increased average growth. Calibrating the model to data for North America and Western Europe, we find that habit persistence lowers welfare gains of financial integration by about 40–50%.
Keywords
  • Habit formation; Financial integration; Growth; Welfare
Disciplines
Publication Date
2003
Citation Information
Egil Matsen. "Habit persistence and welfare gains from international asset trade" Journal of International Money and Finance Vol. 22 Iss. 2 (2003)
Available at: http://works.bepress.com/egil_matsen/4/