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Habit Formation, Interest-Rate Control and Equilibrium Determinacy

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  • Seiya Fujisaki

    () (Graduate School of Economics, Osaka University)

Abstract

We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive monetary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity.

Suggested Citation

  • Seiya Fujisaki, 2009. "Habit Formation, Interest-Rate Control and Equilibrium Determinacy," Discussion Papers in Economics and Business 09-23, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:0923
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0923.pdf
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    References listed on IDEAS

    as
    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Stephanie Schmitt-Grohe & Jess Benhabib & Martin Uribe, 2001. "Monetary Policy and Multiple Equilibria," American Economic Review, American Economic Association, vol. 91(1), pages 167-186, March.
    3. Graham, Liam, 2008. "Consumption habits and labor supply," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 382-395, March.
    4. Qinglai Meng & Chong Yip, 2004. "Investment, interest rate rules, and equilibrium determinacy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 863-878, May.
    5. Weder, Mark, 2000. "Can Habit Formation Solve the Consumption Anomaly in the Two-Sector Business Cycle Model?," Journal of Macroeconomics, Elsevier, vol. 22(3), pages 433-444, July.
    6. repec:ebl:ecbull:v:5:y:2002:i:2:p:1-7 is not listed on IDEAS
    7. Meng, Qinglai, 2002. "Monetary policy and multiple equilibria in a cash-in-advance economy," Economics Letters, Elsevier, vol. 74(2), pages 165-170, January.
    8. Carroll, Christopher D & Overland, Jody & Weil, David N, 1997. "Comparison Utility in a Growth Model," Journal of Economic Growth, Springer, vol. 2(4), pages 339-367, December.
    9. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
    10. Stephane Auray & Fabrice Collard & Patrick Feve, 2005. "Habit Persistence, Money Growth Rule and Real Indeterminacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 48-67, January.
    11. repec:ebl:ecbull:v:5:y:2004:i:10:p:1-9 is not listed on IDEAS
    12. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
    13. repec:ebl:ecbull:v:5:y:2007:i:11:p:1-7 is not listed on IDEAS
    14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    15. Kazuo Mino & Seiya Fujisaki, 2007. "Generalized Taylor Rule and Determinacy of Growth Equilibrium," Economics Bulletin, AccessEcon, vol. 5(11), pages 1-7.
    16. Smith, William T., 2002. "Consumption and saving with habit formation and durability," Economics Letters, Elsevier, vol. 75(3), pages 369-375, May.
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    More about this item

    Keywords

    equilibrium determinacy; habit formation; Taylor rule; endogenous labor.;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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