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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 propagation and monetary transmission in New Keynesian dynamic stochastic general equilibrium (NKDSGE) models. We use Bayesian methods to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to nominal rigidity, the choice of monetary policy rule, the frequencies used for evaluation, and spectra identified by permanent productivity shocks.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2009-16.

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Date of creation: 2009
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Handle: RePEc:fip:fedawp:2009-16

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Cited by:
  1. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  2. Pablo A Guerron-Quintana & James M Nason, 2012. "Bayesian Estimation of DSGE Models," CAMA Working Papers 2012-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. 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 13/80, International Monetary Fund.

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