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Habit Formation and News-driven Business Cycles

Author

Listed:
  • Fengqi Liu

    (Nankai University)

  • Keqing Liu

    (Xiamen University)

  • Jianpo Xue

    (Xiamen University)

Abstract

This paper demonstrates that, in a standard RBC model, internal consumption habits alone are sufficient to generate positive comovements among key macroeconomic aggregates in response to news about future productivity. We highlight the prospective channel associated with internal habits, through which the effect of news shocks is transmitted to the present, stimulating current consumption, labor, and investment. Without this channel, other forms of preferences such as external habits fail to generate the positive comovements. The quantitative performance of the model is also discussed. Arguably, we provide a nearly minimal departure from the RBC framework to generate news-driven business cycles. (Copyright: Elsevier)

Suggested Citation

  • Fengqi Liu & Keqing Liu & Jianpo Xue, 2025. "Habit Formation and News-driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 56, April.
    • Handle: RePEc:red:issued:24-8
    DOI: 10.1016/j.red.2025.101273
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    More about this item

    Keywords

    Habit; Business cycles; News shocks;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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