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Consumption habits and labor supply

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  • Graham, Liam

Abstract

Models with habit formation in consumption have proved useful in understanding a number of macroeconomic features. The key finding of this paper is that, when households can use their labor supply to smooth consumption, habit formation worsens a dynamic model's response to both monetary and technology shocks. Some of the counterfactual implications of a model with habit formation can be rectified by introducing credit constrained households.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 1 (March)
Pages: 382-395

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:382-395

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Web page: http://www.elsevier.com/locate/inca/622617

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References

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  2. Martin Lettau & Harald Uhlig, 2000. "Can Habit Formation be Reconciled with Business Cycle Facts?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 79-99, January.
  3. Bennett T. McCallum, 2001. "Monetary policy analysis in models without money," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 145-164.
  4. Stephen Wright, 2004. "Monetary Stabilisation with Nominal Asymmetries," Economic Journal, Royal Economic Society, vol. 114(492), pages 196-222, 01.
  5. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  6. Graham, Liam, 2003. "Monetary models and technology shocks," Economics Letters, Elsevier, vol. 81(1), pages 47-53, October.
  7. N. Gregory Mankiw, 1999. "The Savers-Spenders Theory of Fiscal Policy," Harvard Institute of Economic Research Working Papers 1888, Harvard - Institute of Economic Research.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  9. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER).
  10. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
  11. Rochelle M. Edge, 2000. "Time-to-build, time-to-plan, habit-persistence, and the liquidity effect," International Finance Discussion Papers 673, Board of Governors of the Federal Reserve System (U.S.).
  12. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  13. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
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Cited by:
  1. Richard McManus, 2013. "Austerity versus Stimulus: A DSGE Political Economy Explanation," Discussion Papers 13/09, Department of Economics, University of York.
  2. Seiya Fujisaki, 2009. "Habit Formation, Interest-Rate Control and Equilibrium Determinacy," Discussion Papers in Economics and Business 09-23, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  3. Richard McManus, 2013. ""We're all in this together"? A DSGE interpretation," Discussion Papers 13/08, Department of Economics, University of York.
  4. Wataru Johdo, 2013. "Does monetary expansion improve welfare under habit formation?," Economics Bulletin, AccessEcon, vol. 33(3), pages 1959-1968.

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