Consumption-habits in a new Keynesian business cycle model

Richard Dennis

No 2008-35, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Consumption-habits have become an integral component in new Keynesian models. However, consumption-habits can be modeled in a host of different ways and this diversity is reflected in the literature. I examine whether different approaches to modeling consumption habits have important implications for business cycle behavior. Using a standard new Keynesian business cycle model, I show that, to a first-order log-approximation, the consumption Euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form. Empirically, I show that whether consumption habits are internal or external has little effect on the model's business cycle characteristics.

Keywords: Business; cycles (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Journal Article: Consumption Habits in a New Keynesian Business Cycle Model (2009)
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