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http://ssrn.com/abstract=1345654
 
 

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Deep Habits and the Dynamic Effects of Monetary Policy Shocks


Morten O. Ravn


European University Institute - Economics Department (ECO); London Business School - Department of Economics; University of Southampton; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Stephanie Schmitt-Grohé


Columbia University - Graduate School of Arts and Sciences - Department of Economics; Centre for Economic Policy Research (CEPR)

Martin Uribe


Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Lenno Uuskula


European University Institute - Economics Department (ECO)

January 2009

CEPR Discussion Paper No. DP7128

Abstract:     
This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes.

Number of Pages in PDF File: 40

Keywords: countercyclical markup, deep habits, inflation persistence, monetayr policy shocks, price puzzle

JEL Classification: E21, E31, E32, E52

working papers series





Date posted: February 18, 2009  

Suggested Citation

Ravn, Morten O. and Schmitt-Grohé, Stephanie and Uribe, Martin and Uuskula, Lenno, Deep Habits and the Dynamic Effects of Monetary Policy Shocks (January 2009). CEPR Discussion Paper No. DP7128. Available at SSRN: http://ssrn.com/abstract=1345654

Contact Information

Morten O. Ravn (Contact Author)
European University Institute - Economics Department (ECO) ( email )
Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy
London Business School - Department of Economics ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 ext. 3717 (Phone)
+44 20 7402 0718 (Fax)
University of Southampton ( email )
University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom
+44 1703 593996 (Phone)
+44 1703 593858 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stephanie Schmitt-Grohé
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
New York, NY 10027
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Martin Uribe
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Lenno Uuskula
European University Institute - Economics Department (ECO) ( email )
Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy
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