Business Cycle Implications of Internal Consumption Habit for New Keynesian Models
Hitotsubashi University - Graduate School of Economics
James M. Nason
Federal Reserve Bank of Philadelphia
August 12, 2010
Federal Reserve Bank of Atlanta Working Paper 2009-16
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.
Number of Pages in PDF File: 118
Keywords: habit, New Keynesian, propagation, monetary transmission, model evaluation, Bayesian Monte Carlo.
JEL Classification: E10, E20, E32working papers series
Date posted: July 5, 2009 ; Last revised: September 8, 2010
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