Deep Habits in the New Keynesian Phillips Curve

Thomas A. Lubik and Wing Leong Teo

Journal of Money, Credit and Banking, 2014, vol. 46, issue 1, 79-114

Abstract: We derive and estimate a New Keynesian Phillips Curve (NKPC) in a model with deep habits. Habits are deep in that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner since it introduces consumption growth and future demand terms into the NKPC equation. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable variables. The resulting series is considerably more volatile than unit labor cost. Generalized methods of moments estimation shows an improved fit and a much lower degree of indexation compared to the standard NKPC.

Date: 2014
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Citations: View citations in EconPapers (13)

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https://doi.org/10.1111/jmcb.12098

Related works:
Working Paper: Deep Habits in the New Keynesian Phillips Curve (2012)
Working Paper: Deep habits in the New Keynesian Phillips curve (2011)
Working Paper: Deep Habits in the New Keynesian Phillips Curve (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:46:y:2014:i:1:p:79-114

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