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Business Cycle Implications of Internal Consumption Habit for New Keynesian Model

  • Takashi Kano

    (Faculty of Economics, University of Tokyo)

  • James M. Nason

    (Research Department, Federal Reserve Bank of Atlanta)

This paper studies the implications of internal consumption habit for propagation and monetary transmission in new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian methods are employed to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to the nominal rigidity, to the choice of monetary policy rule, to the frequencies used for evaluation, and to spectra identified by permanent productivity shocks.

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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-151.

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Length: 43 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:cfi:fseres:cf151
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