Habits and Durability in Consumption, and the Effects of Exchange Rate Policies

A model in which consumption exhibits durability, and habits develop over the flow of services provided by them, is used to study the effects of exchange rate policies. The results of recent studies with regard to the effects of exchange rate policies are brought closer to some recent empirical findings. It is shown that, after a change in the rate of devaluation, the adjustment of consumption, real money holdings, and the country's net foreign asset position will very likely be non-monotonic.