Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle
This paper examines the role of habit persistence in consumption in explaining persistent responses of inflation and output to money growth shocks. A MIU-model with a separable utility function is embedded into a stochastic DGE model with sticky prices. It is shown that for a high degree of habit persistence consumption displays a pronounced and hump-shaped response while the volatility falls short empirical estimates. The behavior of output and inflation does not change compared to a model without habit formation. Empirically plausible degrees of habit persistence still cause consumption to be persistent but do not improve the performance for other macroeconomic aggregates. Most variables are cyclical and too strongly correlated with output. Overall habit persistence in consumption cannot explain the observed reaction of the macroeconomic aggregates to monetary shocks.
Monetary Policy, New Neoclassical Synthesis, Sticky Prices, Persistence, Habit Persistence
This paper examines the role of habit persistence in consumption in explaining persistent responses of inflation and output to money growth shocks. A monetary stochastic dynamic general equilibrium (DGE) model with a money-in-the-utility-function (MIU-) setup is augmented by habit formation in consumption and evaluated for both Taylor and Calvo price staggering. It is shown that in the benchmark Taylor price staggering model consumption displays a persistent response while the volatility falls short empirical estimates. The reaction of most other aggregates including output, inflation and prices is counterfactually cyclical. Investment, labor hours and the real wage are too strongly correlated with output. In the benchmark Calvo price staggering model consumption is hump-shaped. Most variables are persistent and consumption shows a higher standard deviation. In sum, habit persistence in consumption improves the model outcome with respect to consumption's reaction while Calvo staggering improves the ability of a DGE model to explain persistent reactions of the other macroeconomic aggregates to money growth shocks.
Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency; Habit Persistence
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