A Look at Habit Persistence over Business Cycles

This paper sets up a Calvo-type sticky price model as well as a Taylor-type sticky price model, internal habit formation and expenditure delays as in Bernanke et al. (1998). It shows that internal habit formation and expenditure delays improve the sticky price models in explaining the selected variables at nearly all frequencies. Consumption displays a hump-shaped response to a positive monetary shock when there is a moderate habit persistence with capital adjustment costs. However, the models have difficulty in generating the power spectrum of interest rates and its cross correlation with output, as seen in the data.