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Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption

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  • Campbell Leith

    (University of Glasgow)

  • Ioana Moldovan

    (University of Glasgow)

  • Raffaele Rossi

    (University of Milano-Bicocca)

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. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 15 (2012)
Issue (Month): 3 (July)
Pages: 416-435

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Handle: RePEc:red:issued:09-154

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Keywords: Consumption habits; Nominal inertia; Optimal monetary policy;

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References

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  1. Leith, Campbell & Moldovan, Ioana & Rossi, Raffaele, 2009. "Optimal monetary policy in a new Keynesian model with habits in consumption," Working Paper Series, European Central Bank 1076, European Central Bank.
  2. Sharon Kozicki & P.A. Tinsley, 2001. "Dynamic specifications in optimizing trend-deviation macro models," Research Working Paper, Federal Reserve Bank of Kansas City RWP 01-03, Federal Reserve Bank of Kansas City.
  3. Morten Ravn & Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Deep Habits," NBER Working Papers 10261, National Bureau of Economic Research, Inc.
  4. Levine, Paul & Pearlman, Joseph G. & Pierse, Richard, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series, European Central Bank 0759, European Central Bank.
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  9. Jeffery D. Amato & Thomas Laubach, 2001. "Implications of habit formation for optimal monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-58, Board of Governors of the Federal Reserve System (U.S.).
  10. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
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  14. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín & Uusküla, Lenno, 2009. "Deep Habits and the Dynamic Effects of Monetary Policy Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7128, C.E.P.R. Discussion Papers.
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  19. Zubairy, Sarah, 2010. "Deep Habits, Nominal Rigidities and Interest Rate Rules," MPRA Paper 26053, University Library of Munich, Germany.
  20. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 367-390, June.
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  22. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
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  24. Leith, Campbell & Moldovan, Ioana & Rossi, Raffaele, 2008. "Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-55, Scottish Institute for Research in Economics (SIRE).
  25. Campbell Leith & Ioana Moldovan & Raffaele Rossi, 2012. "Online Appendix to "Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption"," Technical Appendices, Review of Economic Dynamics 09-154, Review of Economic Dynamics.
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