Deep Habits, Rule-of-Thumb Consumers, and Fiscal Policy

Daeha Cho and Kwang Hwan Kim
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Kwang Hwan Kim: Yonsei University

Korean Economic Review, 2013, vol. 29, 305-327

Abstract: Procyclical movements in private consumption and countercyclical markup are the most prominent feature to an increase in government spending. In this paper, we model deep habits and rule-of-thumb consumers to match this feature. We demonstrate that when ruleof-thumb consumers meet deep habits in consumption, our model improves the two models that are widely used in the literature to investigate the effect of government spending. First, it generates a more realistic markup response. Second, it reduces the threshold value of ruleof-thumb share necessary to crowd in consumption. The main reason behind the success is because both deep habits and rule-of-thumb consumers mutually reinforce.

Keywords: Government Spending; Deep Habits; Rule-of-thumb Consumers (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (3)

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