Business cycle implications of internal consumption habit for New Keynesian models

Takashi Kano () and James Nason ()

No 2009-16, Working Paper from Federal Reserve Bank of Atlanta

Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in New Keynesian dynamic stochastic general equilibrium (NKDSGE) models. We use Bayesian methods to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to nominal rigidity, the choice of monetary policy rule, the frequencies used for evaluation, and spectra identified by permanent productivity shocks.

New Economics Papers: this item is included in nep-bec, nep-cba, nep-cmp, nep-dge, nep-mac and nep-opm
Date: 2009
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Working Paper: Business Cycle Implications of Internal Consumption Habit for New Keynesian Models (2009)
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