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Business Cycle Implications of Internal Consumption Habit for New Keynesian Models

  • Takashi Kano

    (Faculty of Economics, University of Tokyo)

  • James M. Nason

    (Research Department, Federal Reserve Bank of Atlanta)

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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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-623.

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Length: 43 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:tky:fseres:2009cf623
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