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A NOTE ON COMPARING DEEP AND AGGREGATE HABIT FORMATION IN AN ESTIMATED NEW KEYNESIAN MODEL

Published online by Cambridge University Press:  09 January 2014

Gregory E. Givens
Gregory E. Givens*
Affiliation:
University of Alabama
*
Address correspondence to: Gregory E. Givens, Department of Economics, Finance and Legal Studies, Culverhouse College of Commerce, University of Alabama, Box 870224, 200 Alston Hall, Tuscaloosa, AL 35487, USA; e-mail: gegivens@cba.ua.edu.
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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.

Keywords

Deep HabitsNominal RigiditiesInflation Persistence
Type
Note
Information
Macroeconomic Dynamics , Volume 19 , Issue 5 , July 2015 , pp. 1148 - 1166
Copyright
Copyright © Cambridge University Press 2014 

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