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Does monetary expansion improve welfare under habit formation?

  • Wataru Johdo

    ()

    (Tezukayama University)

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    This paper studies how introducing habit formation to the two-sector small open economy model of Obstfeld and Rogoff (1995) and Lane (1997) affects the impact of a monetary surprise on welfare. In this model with endogenous habit formation, we examine agents' responses to a monetary expansion shock, taking into account the negative effect of habit formation on future consumption utility. We show that when habit formation is relatively important in the utility function, the monetary expansion decreases welfare.

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    File URL: http://www.accessecon.com/Pubs/EB/2013/Volume33/EB-13-V33-I3-P183.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 33 (2013)
    Issue (Month): 3 ()
    Pages: 1959-1968

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    Handle: RePEc:ebl:ecbull:eb-13-00403
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    1. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
    2. Trostel, Philip A & Taylor, Grant A, 2001. "A Theory of Time Preference," Economic Inquiry, Western Economic Association International, vol. 39(3), pages 379-95, July.
    3. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
    4. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
    5. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
    6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
    7. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
    8. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
    9. Graham, Liam, 2008. "Consumption habits and labor supply," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 382-395, March.
    10. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    11. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    12. Lane, Philip R., 1997. "Inflation in open economies," Journal of International Economics, Elsevier, vol. 42(3-4), pages 327-347, May.
    13. Faria, Joao Ricardo, 2001. "Habit formation in a monetary growth model," Economics Letters, Elsevier, vol. 73(1), pages 51-55, October.
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