Liquidity effects and habit formation in a sticky price model

Yongseung Jung

International Economic Journal, 2001, vol. 18, issue 4, 521-546

Abstract: This paper sets up a sticky price model with external habit formations. It shows that the cross-correlation between output and interest rates as well as prices match the data well when there is habit formation. Consumption as well as output display a hump-shaped response to a positive monetary shock when there is habit formation. The paper also shows that the sticky price model with Abel's (1990, 1999) external habit formation succeeds in generating liquidity effects.

Keywords: Habit formation; leading indicator; monetary policy; sticky price; JEL Classification: E31; E52 (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1080/1016873042000299972

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