Deep Habits and the Dynamic Effects of Monetary Policy Shocks

Morten Ravn (), Stephanie Schmitt-Grohe, Martín Uribe and Lenno Uusküla ()

No ECO2008/40, Economics Working Papers from European University Institute

Abstract: This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes.

Keywords: deep habits; monetary policy; price puzzle; inflation persistence; countercyclical markups (search for similar items in EconPapers)
JEL-codes: E21 E31 E32 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2008
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Related works:
Working Paper: Deep Habits and the Dynamic Effects of Monetary Policy Shocks (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2008/40

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