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

Leith, C. , Moldovan, I. and Rossi, R. (2012) Optimal monetary policy in a new Keynesian model with habits in consumption. Review of Economic Dynamics, 15(3), pp. 416-435. (doi: 10.1016/j.red.2012.03.001)

Abstract

In this paper we consider the implications of 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 and create new trade-offs for optimal policy, as the policy maker does not respond as aggressively to technology shocks in order to avoid exacerbating the habits externality. This can dramatically affect both the parameterization of optimal simple rules, as well as their determinacy properties. These effects are particularly strong when habits are of the deep kind.

• Item Type: Articles
• Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Review of Economic Dynamics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Review of Economic Dynamics 15(3), 2012, DOI: 10.1016/j.red.2012.03.001
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Leith, Professor Campbell and Moldovan, Dr Ioana
• Authors: Leith, C., Moldovan, I., and Rossi, R.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Review of Economic Dynamics
• Publisher: Elsevier
• ISSN: 1094-2025
• Published Online: 07 March 2012
• Copyright Holders: Copyright © 2012 Elsevier
• First Published: First published in Review of Economic Dynamics 15(3):416-435
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher

Project Code	Award No	Project Name	Principal Investigator	Funder's Name	Funder Ref	Lead Dept
48017	1	New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic Level	Campbell Leith	Economic & Social Research Council (ESRC)	ES/G006873/1	Economics