Empirical work regarding Intertemporal Current Account (ICA) models has
centered around two distinct testing methodologies, present value tests and
a productivity shock approach as formulated in Glick and Rogoff (1995). In
previous work, Gruber (2001), I have tested an ICA model that
allows for habits in aggregate consumption via the present value method.
This paper applies the alternative Glick and Rogoff style approach to
testing the model. The benefits of doing such are an ability to separate
country-specific from worldwide output changes, a distinction of
considerable importance, as well as to impose restrictions on the
relationship between investment and output, neither of which are possible in
the present value framework. The results of the test are supportive of the
existence of habits and coincide with the results of Gruber (2001).
The degree of habit persistence implied by the model is estimated for the
G-7 countries. The paper also proposes habit formation as a possible
solution to an empirical puzzle identified in the original Glick and Rogoff paper.
Full paper (391 KB PDF)
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Last update: August 15, 2002