Consumption Habits in a New Keynesian Business Cycle Model

Richard Dennis

Journal of Money, Credit and Banking, 2009, vol. 41, issue 5, 1015-1030

Abstract: Consumption habits have become an integral component in new Keynesian models. However, consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature. I examine whether different approaches to modeling consumption habits have important implications for business cycle behavior. Using a standard New Keynesian business cycle model, I show that, to a first-order log-approximation, the consumption Euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form. Empirically, I show that whether consumption habits are internal or external has little effect on the model's business cycle characteristics. Copyright (c) 2009 The Ohio State University.

Date: 2009
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Working Paper: Consumption-habits in a new Keynesian business cycle model (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:41:y:2009:i:5:p:1015-1030

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