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Business Cycle Implications of Internal Consumption Habit for New Keynesian Models

  • Takashi Kano

    ()

  • James M. Nason

    ()

This paper studies the implications of internal consumption habit for new Keynesian dynamic stochastic general equilibrium (NKDSGE) models. Bayesian Monte Carlo methods are employed to evaluate NKDSGE model fit. Simulation experiments show that consumption habit often improves the ability of NKDSGE models to match output and consumption growth spectra. Nonetheless, the fit of NKDSGE models with consumption habit is susceptible to the source of the nominal rigidity, to spectra identified by permanent productivity shocks, to the frequencies used for evaluation, and to the choice of monetary policy rule. These vulnerabilities suggest that NKDSGE model specification is fragile.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2010/Kano_Nason_312010.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-31.

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Length: 119 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-31
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