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Consumption Habits in a New Keynesian Business Cycle Model

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  • RICHARD DENNIS

Abstract

Consumption habits have become an integral component in new Keynesian models. However, consumption habits can be modeled in a host of different ways and this diversity is reflected in the literature. I examine whether different approaches to modeling consumption habits have important implications for business cycle behavior. Using a standard New Keynesian business cycle model, I show that, to a first-order log-approximation, the consumption Euler equation associated with the additive functional form for habit formation encompasses the multiplicative function form. Empirically, I show that whether consumption habits are internal or external has little effect on the model's business cycle characteristics. Copyright (c) 2009 The Ohio State University.

Suggested Citation

  • Richard Dennis, 2009. "Consumption Habits in a New Keynesian Business Cycle Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 1015-1030, August.
    • Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:5:p:1015-1030
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