Habit Formation and the Persistence of Monetary Shocks

CRDE-CIREQ Working Paper No. 2002-08

38 Pages Posted: 20 May 2003

See all articles by Emanuela Cardia

Emanuela Cardia

University of Montreal - Center for Research and Development in Economics

Hafedh Bouakez

HEC Montréal

Francisco J. Ruge-Murcia

University of Montreal - Department of Economics; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: May 2002

Abstract

This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. This paper constructs and estimates a general equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated via Maximum Likelihood using US data on output, the real money stock, and the nominal interest rate. Econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

Keywords: habit formation, endogenous persistence, monetary policy

Suggested Citation

Cardia, Emanuela and Bouakez, Hafedh and Ruge-Murcia, Francisco J., Habit Formation and the Persistence of Monetary Shocks (May 2002). CRDE-CIREQ Working Paper No. 2002-08. Available at SSRN: https://ssrn.com/abstract=383603 or http://dx.doi.org/10.2139/ssrn.383603

Emanuela Cardia (Contact Author)

University of Montreal - Center for Research and Development in Economics ( email )

Montreal, Quebec H3T 1B9
Canada

Hafedh Bouakez

HEC Montréal ( email )

3000, chemin de la Côte-Sainte-Catherine
Montréal, Québec H3T 2A7
Canada
1-514-340-7003 (Phone)
1-514-340-6469 (Fax)

Francisco J. Ruge-Murcia

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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