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Habit Formation, Interest-Rate Control and Equilibrium Determinacy

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  • Seiya Fujisaki

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    (Graduate School of Economics, Osaka University)

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    Abstract

    We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive monetary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0923.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-23.

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    Length: 26 pages
    Date of creation: Aug 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0923

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: equilibrium determinacy; habit formation; Taylor rule; endogenous labor.;

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    1. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(3), pages 519-43, June.
    2. Smith, William T., 2002. "Consumption and saving with habit formation and durability," Economics Letters, Elsevier, Elsevier, vol. 75(3), pages 369-375, May.
    3. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, Elsevier, vol. 68(1), pages 67-77, July.
    4. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "Monetary policy and multiple equilibria," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-29, Board of Governors of the Federal Reserve System (U.S.).
    5. repec:ebl:ecbull:v:5:y:2002:i:2:p:1-7 is not listed on IDEAS
    6. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 1-90, Wharton School Rodney L. White Center for Financial Research.
    7. Qinglai Meng & Chong Yip, 2004. "Investment, interest rate rules, and equilibrium determinacy," Economic Theory, Springer, Springer, vol. 23(4), pages 863-878, May.
    8. Meng, Qinglai, 2002. "Monetary policy and multiple equilibria in a cash-in-advance economy," Economics Letters, Elsevier, Elsevier, vol. 74(2), pages 165-170, January.
    9. Christopher D. Carroll & Jody Overland & David N. Weil, 1997. "Comparison Utility in a Growth Model," NBER Working Papers 6138, National Bureau of Economic Research, Inc.
    10. repec:ebl:ecbull:v:5:y:2004:i:10:p:1-9 is not listed on IDEAS
    11. Graham, Liam, 2008. "Consumption habits and labor supply," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 382-395, March.
    12. Weder, Mark, 2000. "Can Habit Formation Solve the Consumption Anomaly in the Two-Sector Business Cycle Model?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 22(3), pages 433-444, July.
    13. repec:ebl:ecbull:v:5:y:2007:i:11:p:1-7 is not listed on IDEAS
    14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
    15. Stephane Auray & Fabrice Collard & Patrick Feve, 2005. "Habit Persistence, Money Growth Rule and Real Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 48-67, January.
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