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Habit Formation, Interest-Rate Control and Equilibrium Determinacy

  • Seiya Fujisaki

    ()

    (Graduate School of Economics, Osaka University)

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    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.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0923.pdf
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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 09-23.

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    Length: 26 pages
    Date of creation: Aug 2009
    Date of revision:
    Handle: RePEc:osk:wpaper:0923
    Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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    1. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
    2. Smith, William T., 2002. "Consumption and saving with habit formation and durability," Economics Letters, Elsevier, vol. 75(3), pages 369-375, May.
    3. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers 98-02, C.V. Starr Center for Applied Economics, New York University.
    4. repec:ebl:ecbull:v:5:y:2007:i:11:p:1-7 is not listed on IDEAS
    5. 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 519-43, June.
    6. Graham, Liam, 2008. "Consumption habits and labor supply," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 382-395, March.
    7. Christopher D Carroll, 2000. "Solving Consumption Models with Multiplicative Habits," Economics Working Paper Archive 421, The Johns Hopkins University,Department of Economics.
    8. 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.
    9. Carroll, Christopher D & Overland, Jody & Weil, David N, 1997. " Comparison Utility in a Growth Model," Journal of Economic Growth, Springer, vol. 2(4), pages 339-67, December.
    10. repec:ebl:ecbull:v:5:y:2002:i:2:p:1-7 is not listed on IDEAS
    11. Qinglai Meng & Chong Yip, 2004. "Investment, interest rate rules, and equilibrium determinacy," Economic Theory, Springer, vol. 23(4), pages 863-878, May.
    12. repec:ebl:ecbull:v:5:y:2004:i:10:p:1-9 is not listed on IDEAS
    13. 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.
    14. Meng, Qinglai, 2002. "Monetary policy and multiple equilibria in a cash-in-advance economy," Economics Letters, Elsevier, vol. 74(2), pages 165-170, January.
    15. 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.
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