Does monetary expansion improve welfare under habit formation?

Wataru Johdo ()
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Wataru Johdo: Tezukayama University

Economics Bulletin, 2013, vol. 33, issue 3, 1959-1968

Abstract: This paper studies how introducing habit formation to the two-sector small open economy model of Obstfeld and Rogoff (1995) and Lane (1997) affects the impact of a monetary surprise on welfare. In this model with endogenous habit formation, we examine agents' responses to a monetary expansion shock, taking into account the negative effect of habit formation on future consumption utility. We show that when habit formation is relatively important in the utility function, the monetary expansion decreases welfare.

Keywords: Habit formation; Monetary policy; Welfare; Small Open Economy Model (search for similar items in EconPapers)
JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2013-07-30
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Citations: View citations in EconPapers (1)

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