Deep habits in the New Keynesian Phillips curve
We derive and estimate a New Keynesian Phillips curve (NKPC) in a model where consumers are assumed to have deep habits. Habits are deep in the sense that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner as it introduces expected and contemporaneous consumption growth as well as the expected marginal value of future demand as additional driving forces for inflation dynamics. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable variables. The resulting series is considerably more volatile than unit labor cost. General Methods of Moments (GMM) estimation of the NKPC shows an improved fit and a much lower degree of indexation than in the standard NKPC. Our analysis also reveals that the crucial parameters for the performance of the deep habit NKPC are the habit parameter and the substitution elasticity between differentiated products. The results are broadly robust to alternative specifications.
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- Thomas A Lubik & Wing Teong Teo, .
"Inventories, Inflation Dynamics and the New Keynesian Phillips Curve,"
10/02, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
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- Thomas A. Lubik & Wing Leong Teo, 2010. "Inventories, Inflation Dynamics and the New Keynesian Phillips Curve," CAMA Working Papers 2010-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Thomas A. Lubik & Wing Leong Teo, 2010. "Inventories, inflation dynamics, and the New Keynesian Phillips curve," Working Paper 10-01, Federal Reserve Bank of Richmond.
- Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2004.
CEPR Discussion Papers
4269, C.E.P.R. Discussion Papers.
- Krause, Michael & López-Salido, José David & Lubik, Thomas A., 2007.
"Do Search Frictions Matter for Inflation Dynamics?,"
Kiel Working Papers
1353, Kiel Institute for the World Economy (IfW).
- Krause, Michael U. & Lopez-Salido, David J. & Lubik, Thomas A., 2008. "Do search frictions matter for inflation dynamics?," European Economic Review, Elsevier, vol. 52(8), pages 1464-1479, November.
- Michael U. Krause & David J. Lopez-Salido & Thomas Lubik, 2007. "Do Search Frictions Matter for Inflation Dynamics?," Kiel Working Papers 1353, Kiel Institute for the World Economy.
- James M. Nason & Gregor W. Smith, 2008. "The New Keynesian Phillips curve : lessons from single-equation econometric estimation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 361-395.
- Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín & Uusküla, Lenno, 2009.
"Deep Habits and the Dynamic Effects of Monetary Policy Shocks,"
CEPR Discussion Papers
7128, C.E.P.R. Discussion Papers.
- Ravn, Morten O. & Schmitt-Grohe, Stephanie & Uribe, Martín & Uuskula, Lenno, 2010. "Deep habits and the dynamic effects of monetary policy shocks," Journal of the Japanese and International Economies, Elsevier, vol. 24(2), pages 236-258, June.
- Morten O. Ravn & Stephanie Schmitt-Grohe & Martín Uribe & Lenno Uuskula, 2008. "Deep Habits and the Dynamic Effects of Monetary Policy Shocks," Economics Working Papers ECO2008/40, European University Institute.
- Guerrieri, Luca & Gust, Christopher & López-Salido, J David, 2009.
"International Competition and Inflation: A New Keynesian Perspective,"
CEPR Discussion Papers
7561, C.E.P.R. Discussion Papers.
- Luca Guerrieri & Christopher Gust & J. David López-Salido, 2010. "International Competition and Inflation: A New Keynesian Perspective," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 247-80, October.
- Luca Guerrieri & Christopher J. Gust & David López-Salido, 2008. "International competition and inflation: a New Keynesian perspective," International Finance Discussion Papers 918, Board of Governors of the Federal Reserve System (U.S.).
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