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Habit Formation and the Persistence of Monetary Shocks

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Author Info
Hafedh Bouakez
Emanuela Cardia
Francisco J. Ruge-Murcia

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File URL: http://www.bankofcanada.ca/en/res/wp/2002/wp02-27.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 02-27.

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Length: 45 pages Abstract: This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general-equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. The paper constructs and estimates a general-equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated by the maximum-likelihood method using U.S. data on output, the real money stock, and the nominal interest rate. Econometric results indicate that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse-response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-27

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Keywords: Business fluctuations and cycles Transmission of monetary policy

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. James M. Nason & Takashi Kano, 2004. "Business Cycle Implications of Habit Formation," Computing in Economics and Finance 2004 175, Society for Computational Economics. [Downloadable!]
    Other versions:
  2. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2004. "Estimating Dynamic Equilibrium Economies: Linear versus Nonlinear Likelihood," PIER Working Paper Archive 04-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Nooman Rebei, 2004. "Characterization of the Dynamic Effects of Fiscal Shocks in a Small Open Economy," Working Papers 04-41, Bank of Canada. [Downloadable!]
  4. Ray C. Fair, 2006. "Evaluating Inflation Targeting Using a Macroeconometric Model," Levine's Bibliography 321307000000000303, UCLA Department of Economics. [Downloadable!]
    Other versions:
  5. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2005. "Forecasting Canadian Time Series with the New-Keynesian Model," Cahiers de recherche 0527, CIRPEE. [Downloadable!]
    Other versions:
  6. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada. [Downloadable!]
  7. Chahnez Boudaya, 2005. "The effects of technological innovations on employment : a new explanation," Cahiers de la Maison des Sciences Economiques v05013, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  8. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January. [Downloadable!] (restricted)
  9. Michael Gail, 2003. "Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle," Volkswirtschaftliche Diskussionsbeitraege 111-03, Universitaet Siegen, Fachbereich Wirtschaftswissenschaften, revised Jul 2004. [Downloadable!]
    Other versions:
  10. Juan F. Rubio-Ramirez & Jesus Fernández-Villaverde, 2005. "Estimating dynamic equilibrium economies: linear versus nonlinear likelihood," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 891-910. [Downloadable!]
  11. RUGE-MURCIA, Francisco J., 2003. "Methods to Estimate Dynamic Stochastic General Equilibrium Models," Cahiers de recherche 17-2003, Centre interuniversitaire de recherche en économie quantitative, CIREQ. [Downloadable!]
    Other versions:
  12. Hafedh Bouakez & Nooman Rebei, 2003. "Why Does Private Consumption Rise After a Government Spending Shock?," Working Papers 03-43, Bank of Canada. [Downloadable!]
    Other versions:
  13. Philip Liu, 2006. "A Small New Keynesian Model of the New Zealand economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/03, Reserve Bank of New Zealand. [Downloadable!]
  14. Michael S. Hanson & Pavel Kapinos, 2006. "Targeting Rules with Intrinsic Persistence and Endogenous Policy Inertia," Wesleyan Economics Working Papers 2006-019, Wesleyan University, Department of Economics. [Downloadable!]
  15. Ali Dib & Kevin Moran, 2005. "Forecasting with the New-Keynesian Model: An Experiment with Canadian Data," Computing in Economics and Finance 2005 235, Society for Computational Economics. [Downloadable!]
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