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Deep Habits, Rule-of-Thumb Consumers, and Fiscal Policy

Author

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  • Daeha Cho

    (Boston University)

  • Kwang Hwan Kim

    (Yonsei University)

Abstract

Procyclical movements in private consumption and countercyclical markup are the most prominent feature to an increase in government spending. In this paper, we model deep habits and rule-of-thumb consumers to match this feature. We demonstrate that when ruleof-thumb consumers meet deep habits in consumption, our model improves the two models that are widely used in the literature to investigate the effect of government spending. First, it generates a more realistic markup response. Second, it reduces the threshold value of ruleof-thumb share necessary to crowd in consumption. The main reason behind the success is because both deep habits and rule-of-thumb consumers mutually reinforce.

Suggested Citation

  • Daeha Cho & Kwang Hwan Kim, 2013. "Deep Habits, Rule-of-Thumb Consumers, and Fiscal Policy," Korean Economic Review, Korean Economic Association, vol. 29, pages 305-327.
    • Handle: RePEc:kea:keappr:ker-20131231-29-2-03
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    References listed on IDEAS

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    Cited by:

    1. Aloui, Rym, 2024. "Habit formation and the government spending multiplier," Economic Modelling, Elsevier, vol. 132(C).
    2. Orlando Gomes, 2021. "Hand-to-mouth consumers, rule-of-thumb savers, and optimal control," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(2), pages 229-263, April.

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    More about this item

    Keywords

    Government Spending; Deep Habits; Rule-of-thumb Consumers;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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