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Habit Formation: Deep and Uncertain

Ali Choudhary and Young-Bae Kim ()

Economics Bulletin, 2007, vol. 4, issue 5, 1-7

Abstract: We extend the Ravn, Schmitt-Grohe and Uribe (Review of Economic Studies, 2006) model of external deep-habits with the idea that some product varieties are more prone to habit formation than others. This s uncertainty in habit formation which affects firm's pricing. Provided that uncertainty is strong, a profound implication is that role of market frictions, such as habit formation, and its consequences for the dynamic variations in the markups can be reversed.

JEL-codes: D1 E3 (search for similar items in EconPapers)
Date: 2007-02-18
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