Habit formation in state-dependent pricing models: Implications for the dynamics of output and prices

Phuong Ngo

Economics Letters, 2014, vol. 123, issue 3, 336-340

Abstract: This paper examines the role of habit formation in a standard state-dependent pricing (SDP) model. Incorporating habit formation helps the SDP model to generate hump-shaped and more persistent output responses under a monetary shock. More importantly, incorporating habit formation causes dramatic changes in firm-level pricing behaviors and, as a result, the aggregate price index.

Keywords: Sticky prices; State-dependent pricing; Habit formation; Monetary policy transmission mechanism (search for similar items in EconPapers)
JEL-codes: E20 E31 E37 E52 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:123:y:2014:i:3:p:336-340

DOI: 10.1016/j.econlet.2014.03.012

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