Habit Formation and the Persistence of Monetary Shocks

Topics:
Financial Regulations
Tags:
Bank Of Canada,
Finance,
Financial Planning,
Financial Services,
Shock
Source:
Bank of Canada

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Overview: 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. The paper constructs and estimates a general-equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated by the maximum-likelihood method using U.S. data on output, the real money stock, and the nominal interest rate. In particular, impulse-response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

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Format: HTML | Size: 1,000KB | Date: Oct 2002 | Pages: 45

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