Optimal monetary policy in a new Keynesian model with habits in consumption

Campbell Leith, Ioana Moldovan () and Raffaele Rossi

Working Papers from Business School - Economics, University of Glasgow

Abstract: While consumption habits have been utilised as a means of generating a humpshaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly, external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules.

Keywords: consumption habits; nominal inertia; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E30 E61 (search for similar items in EconPapers)
Date: 2008-11, Revised 2008-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption (2012)
Working Paper: Optimal monetary policy in a new Keynesian model with habits in consumption (2009)
Working Paper: Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2008_30

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