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Liquidity effects and habit formation in a sticky price model

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  • Yongseung Jung

Abstract

This paper sets up a sticky price model with external habit formations. It shows that the cross-correlation between output and interest rates as well as prices match the data well when there is habit formation. Consumption as well as output display a hump-shaped response to a positive monetary shock when there is habit formation. The paper also shows that the sticky price model with Abel's (1990, 1999) external habit formation succeeds in generating liquidity effects.

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  • Yongseung Jung, 2001. "Liquidity effects and habit formation in a sticky price model," International Economic Journal, Taylor & Francis Journals, vol. 18(4), pages 521-546.
    • Handle: RePEc:taf:intecj:v:18:y:2001:i:4:p:521-546
    DOI: 10.1080/1016873042000299972
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    More about this item

    Keywords

    Habit formation; leading indicator; monetary policy; sticky price; JEL Classification: E31; E52;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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