HABITS AND DURABILITY IN CONSUMPTION, AND THE DYNAMICS OF THE CURRENTACCOUNT

A model in which consumption exhibits durability, and habits develop o ver the flow of services provided by them is used to study current acc ount dynamics. Durability leads to adjacent substitutability in consum ption, while habits are assumed to lead to adjacent complementarity. T he adjustment of the current account may be non-monotonic. If habit ef fects are dominant in the short run, and durability effects in the lon g run, then after a terms of trade deterioration we will have a curren t account deficit followed by a surplus (the J-curve). In the opposite case a surplus will be followed by a deficit. (C) 1998 Elsevier Scien ce BN.