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Deep Habits and the Dynamic Effects of Monetary Policy Shocks

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  • Ravn, Morten O.
  • Schmitt-Grohé, Stephanie
  • Uribe, Martín
  • Uusküla, Lenno

Abstract

This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7128.

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Date of creation: Jan 2009
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Handle: RePEc:cpr:ceprdp:7128

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Keywords: countercyclical markup; deep habits; inflation persistence; monetayr policy shocks; price puzzle;

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References

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  1. Alastair Hall & Atsushi & James M Nason & Barbara Rossi, 2009. "Information Criteria For Impulse Response Function Matching Estimation Of Dsge Models," Working Papers 09-09, Duke University, Department of Economics.
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  20. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
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