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On Sunspots, Habits, And Monetary Facts

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  • AURAY, ST PHANE
  • F VE, PATRICK

Abstract

This paper proposes a sunspot-based mechanism that quantitatively accounts for the main monetary facts. In particular, we propose a cash-in-advance model with habit persistence and local durability in consumption decisions. In this context, when habit persistence is strong enough, there is real indeterminacy. We show that when sunspots positively correlate with money injections, the model generates a persistent response of inflation, a hump-shaped response of output, and the price puzzle. We then apply the model to the U.S data and we show that it performs well in reproducing the monetary transmission mechanism and the price puzzle in the short run.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 12 (2008)
Issue (Month): 01 (February)
Pages: 72-96

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Handle: RePEc:cup:macdyn:v:12:y:2008:i:01:p:72-96_06

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Cited by:
  1. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
  2. Kapinos, Pavel, 2011. "Forward-looking monetary policy and anticipated shocks to inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 620-633.
  3. Holden, Tom, 2008. "Rational macroeconomic learning in linear expectational models," MPRA Paper 10872, University Library of Munich, Germany.

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