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Business Cycle Implications of Internal Consumption Habit for New Keynesian Models

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  • Takashi Kano

    ()

  • James M. Nason

    ()

Abstract

This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-31.

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Length: 119 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-31

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Cited by:
  1. Pablo A. Guerrón-Quintana & James M. Nason, 2012. "Bayesian estimation of DSGE models," Working Papers 12-4, Federal Reserve Bank of Philadelphia.
  2. Juliana Dutra Araujo & Grace Bin Li & Marcos Poplawski-Ribeiro & Luis-Felipe Zanna, 2013. "Current Account Norms in Natural Resource Rich and Capital Scarce Economies," IMF Working Papers, International Monetary Fund 13/80, International Monetary Fund.
  3. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.

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