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On Sunspots, Habits, And Monetary Facts

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  • AURAY, STÉPHANE
  • FÈVE, PATRICK

Abstract

This paper proposes a sunspot-based mechanism that quantitatively accounts for the main monetary facts. In particular, we propose a cash-in-advance model with habit persistence and local durability in consumption decisions. In this context, when habit persistence is strong enough, there is real indeterminacy. We show that when sunspots positively correlate with money injections, the model generates a persistent response of inflation, a hump-shaped response of output, and the price puzzle. We then apply the model to the U.S data and we show that it performs well in reproducing the monetary transmission mechanism and the price puzzle in the short run.

Suggested Citation

  • Auray, Stéphane & Fève, Patrick, 2008. "On Sunspots, Habits, And Monetary Facts," Macroeconomic Dynamics, Cambridge University Press, vol. 12(1), pages 72-96, February.
    • Handle: RePEc:cup:macdyn:v:12:y:2008:i:01:p:72-96_06
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    Cited by:

    1. Holden, Tom, 2008. "Rational macroeconomic learning in linear expectational models," MPRA Paper 10872, University Library of Munich, Germany.
    2. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
    3. Ali, Syed Zahid & Anwar, Sajid, 2017. "Exchange rate pass through, cost channel to monetary policy transmission, adaptive learning, and the price puzzle," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 69-82.
    4. Kapinos, Pavel, 2011. "Forward-looking monetary policy and anticipated shocks to inflation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 620-633.
    5. Ali, Syed Zahid & Anwar, Sajid, 2018. "Price puzzle in a small open New Keynesian model," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 29-42.

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