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A Note On Comparing Deep And Aggregate Habit Formation In An Estimated New Keynesian Model

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  • Givens, Gregory E.

Abstract

Habit formation is a fixture of contemporary new Keynesian models. The vast majority assume that agents form habits strictly over consumption of an aggregate good, leaving open the question of whether it might be preferable to have them form habits over differentiated products instead–an arrangement known as deep habits. I answer this question by estimating a model that nests both habit concepts as special cases. Estimates reveal that the data favor a specification in which consumption habits are stronger at the product level than at the aggregate level. A mix of significance tests and simulation results indicate that including deep habits greatly improves model fit, most notably with regard to inflation dynamics.

Suggested Citation

  • Givens, Gregory E., 2015. "A Note On Comparing Deep And Aggregate Habit Formation In An Estimated New Keynesian Model," Macroeconomic Dynamics, Cambridge University Press, vol. 19(5), pages 1148-1166, July.
    • Handle: RePEc:cup:macdyn:v:19:y:2015:i:05:p:1148-1166_00
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    Cited by:

    1. Givens, Gregory E., 2016. "On the gains from monetary policy commitment under deep habits," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 19-36.
    2. Steve Fleetwood, 2021. "A definition of habit for socio-economics," Review of Social Economy, Taylor & Francis Journals, vol. 79(2), pages 131-165, April.

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