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Business Cycle Implications of Internal Consumption Habit for New Keynesian Models

  • Kano, Takashi
  • Nason, James M.

We study 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 internal consumption habit often improves the ability of NKDSGE models to match the spectra of output and consumption growth. Nonetheless, the fit of NKDSGE models with internal consumption habit is susceptible to the sources of nominal rigidity, to spectra identified by permanent productivity shocks, to the choice of monetary policy rule, and to the frequencies used for evaluation. These vulnerabilities indicate that the specification of NKDSGE models is fragile.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25327/1/070econDP12-09.pdf
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Paper provided by Graduate School of Economics, Hitotsubashi University in its series Discussion Papers with number 2012-09.

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Length: 22, [5] p.
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:hit:econdp:2012-09
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Web page: http://www.econ.hit-u.ac.jp/

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