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Deep or aggregate habit formation? Evidence from a new-Keynesian business cycle model

Author

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  • Givens, Gregory
Abstract
Habit formation is a fixture of contemporary new-Keynesian models. The vast majority assume that agents form habits strictly over consumption of an aggregate good, leaving open the question of whether it might be preferable to have them form habits over differentiated products instead–an arrangement known as deep habits. I answer this question by estimating a model that nests both habit concepts as special cases. Estimates reveal that the data favor a specification in which consumption habits are stronger at the product level than at the aggregate level. A mix of significance tests and simulation results indicate that including deep habits greatly improves model fit, most notably with regard to inflation dynamics.

Suggested Citation

  • Givens, Gregory, 2013. "Deep or aggregate habit formation? Evidence from a new-Keynesian business cycle model," MPRA Paper 45204, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:45204
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Deep Habits; Nominal Rigidities; Inflation Persistence;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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