Business cycle implications of internal consumption habit for New Keynesian models

Vol: 
31/2010
Author name: 
Kano T
Nason JM
Year: 
2010
Month: 
October
Abstract: 

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.

Publication file: 

Updated:  22 October 2021/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin