Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle

Michael Gail ()

Volkswirtschaftliche Diskussionsbeitraege from Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht

Abstract: This paper examines the role of habit persistence in consumption in explaining persistent responses of inflation and output to money growth shocks. A monetary stochastic dynamic general equilibrium (DGE) model with a money-in-the-utility-function (MIU-) setup is augmented by habit formation in consumption and evaluated for both Taylor and Calvo price staggering. It is shown that in the benchmark Taylor price staggering model consumption displays a persistent response while the volatility falls short empirical estimates. The reaction of most other aggregates including output, inflation and prices is counterfactually cyclical. Investment, labor hours and the real wage are too strongly correlated with output. In the benchmark Calvo price staggering model consumption is hump-shaped. Most variables are persistent and consumption shows a higher standard deviation. In sum, habit persistence in consumption improves the model outcome with respect to consumption's reaction while Calvo staggering improves the ability of a DGE model to explain persistent reactions of the other macroeconomic aggregates to money growth shocks.

Keywords: Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency; Habit Persistence (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2003-07, Revised 2004-07
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Related works:
Working Paper: Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:sie:siegen:111-03

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