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Business Cycle Implications of Internal Consumption Habit for New Keynesian Models

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  • Kano, Takashi
  • Nason, James M.

Abstract

We study 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 internal consumption habit often improves the ability of NKDSGE models to match the spectra of output and consumption growth. Nonetheless, the fit of NKDSGE models with internal consumption habit is susceptible to the sources of nominal rigidity, to spectra identified by permanent productivity shocks, to the choice of monetary policy rule, and to the frequencies used for evaluation. These vulnerabilities indicate that the specification of NKDSGE models is fragile.

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Bibliographic Info

Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2012-09.

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Length: 22, [5] p.
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:hit:econdp:2012-09

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Keywords: Consumption Habit; New Keynesian; Propagation; Monetary Transmission; Posterior Predictive Analysis; Bayesian Monte Carlo;

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Citations

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Cited by:
  1. 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.
  2. Pablo A. Guerrón-Quintana & James M. Nason, 2012. "Bayesian estimation of DSGE models," Working Papers 12-4, Federal Reserve Bank of Philadelphia.
  3. 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.

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