Abstract
This paper develops a new open economy macroeconomics model by allowing for habit formation in labor supply. The main findings of our analysis are that 1) an increase in the importance of working habits strengthens the effect of monetary policy shocks on relative consumption, weakens on change in the equilibrium exchange rate, and 2) an increase in the importance of working habits strengthens the response of relative consumption and the equilibrium exchange rate change to fiscal policy shocks.
Highlights
Similar to consumption habit (Abel [1]) which is widely discussed in macroeconomics and finance, labor supply in habit formation is very important due to the fact that it plays an important role in determining labor supply
Woittiez and Kapteyn [2] find empirical evidence that habit formation and preference interdependence play an important role in determining female labor supply in the Netherlands
We use a two-country model in new open economy macro-economics (NOEM) framework rather than closed-economy endogenous growth or RBC approaches. This allows us to take into account the macroeconomic propagation mechanism of monetary policy as well as fiscal policy in working habit based on benchmark OR model
Summary
Similar to consumption habit (Abel [1]) which is widely discussed in macroeconomics and finance, labor supply in habit formation is very important due to the fact that it plays an important role in determining labor supply. Woittiez and Kapteyn [2] find empirical evidence that habit formation and preference interdependence play an important role in determining female labor supply in the Netherlands. From the views of work ethics, Faria [4] firstly introduces working habits in a neoclassical growth model and compares its results with a model without habit formation in labor supply. We use a two-country model in NOEM framework rather than closed-economy endogenous growth or RBC approaches. This allows us to take into account the macroeconomic propagation mechanism of monetary policy as well as fiscal policy in working habit based on benchmark OR model.
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