Habit Formation and the Persistence of Monetary Shocks

Hafedh Bouakez (), Emanuela Cardia () and Francisco J. Ruge-Murcia ()

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. This paper constructs and estimates a general equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated via Maximum Likelihood using US data on output, the real money stock, and the nominal interest rate. Econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

Keywords: habit formation; endogenous rsistence; monetary licy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mon
Date: Written 2002
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http://hdl.handle.net/1866/376 (application/pdf)

Related works:
Working Paper: Habit Formation and the Persistence of Monetary Shocks (2002)
Working Paper: Habit Formation and the Persistence of Monetary Shocks (2003)
Working Paper: Habit Formation and the Persistence of Monetary Shocks (2002)
Journal Article: Habit formation and the persistence of monetary shocks (2005)
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