Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle

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Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle

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Michael Gail ()

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Michael Gail

Abstract

This paper examines the role of habit persistence in consumption in explaining persistent responses of inflation and output to money growth shocks. A monetary stochastic dynamic general equilibrium (DGE) model with a money-in-the-utility-function (MIU-) setup is augmented by habit formation in consumption and evaluated for both Taylor and Calvo price staggering. It is shown that in the benchmark Taylor price staggering model consumption displays a persistent response while the volatility falls short empirical estimates. The reaction of most other aggregates including output, inflation and prices is counterfactually cyclical. Investment, labor hours and the real wage are too strongly correlated with output. In the benchmark Calvo price staggering model consumption is hump-shaped. Most variables are persistent and consumption shows a higher standard deviation. In sum, habit persistence in consumption improves the model outcome with respect to consumption's reaction while Calvo staggering improves the ability of a DGE model to explain persistent reactions of the other macroeconomic aggregates to money growth shocks.

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Publisher Info
Paper provided by Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht in its series Volkswirtschaftliche Diskussionsbeitraege with number 111-03.

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Length: 42 pages
Date of creation: Jul 2003
Date of revision: Jul 2004
Handle: RePEc:sie:siegen:111-03

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Web page: http://www.uni-siegen.de/fb5/vwl/research/diskussionsbeitraege/

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Paper
- Michael Gail, 2004. "Habit Persistence in Consumption in a Sticky Price Model of the Business Cycle," Computing in Economics and Finance 2004 189, Society for Computational Economics. [Downloadable!]

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-DGE-2003-07-13 (Dynamic General Equilibrium)

References listed on IDEAS
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Other versions:
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