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Liquidity effects and habit formation in a sticky price model

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  • Yongseung Jung

Abstract

This paper sets up a sticky price model with external habit formations. It shows that the cross-correlation between output and interest rates as well as prices match the data well when there is habit formation. Consumption as well as output display a hump-shaped response to a positive monetary shock when there is habit formation. The paper also shows that the sticky price model with Abel's (1990, 1999) external habit formation succeeds in generating liquidity effects.

Suggested Citation

  • Yongseung Jung, 2001. "Liquidity effects and habit formation in a sticky price model," International Economic Journal, Taylor & Francis Journals, vol. 18(4), pages 521-546.
  • Handle: RePEc:taf:intecj:v:18:y:2001:i:4:p:521-546
    DOI: 10.1080/1016873042000299972
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    References listed on IDEAS

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    More about this item

    Keywords

    Habit formation; leading indicator; monetary policy; sticky price; JEL Classification: E31; E52;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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