Consumption habits in a New Keynesian business cycle model

Dennis, R. (2009) Consumption habits in a New Keynesian business cycle model. Journal of Money, Credit and Banking, 41(5), pp. 1015-1030. (doi: 10.1111/j.1538-4616.2009.00242.x)

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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.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Dennis, Professor Richard
Authors: Dennis, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Money, Credit and Banking
ISSN (Online):1538-4616

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