IDEAS home Printed from https://ideas.repec.org/a/wly/canjec/v38y2005i2p430-453.html
   My bibliography  Save this article

Money, capital, and real liquidity effects with habit formation

Author

Listed:
  • Arman Mansoorian
  • Leo Michelis

Abstract

. The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short‐ and long‐term real interest rates. The adjustment of the capital stock is non‐monotonic. Employment and the short‐ and long‐term real interest rates may also adjust non‐monotonically. JEL classification: E22, E52, E58 Monnaie, capital, et effets réels de liquidité quand il y a formation d’habitudes. On ré‐examine le rôle de la monnaie dans un modèle d’utilité quand travail et formation d’habitudes sont endogènes. Dans le cadre des postulats usuels à propos des préférences, et d’une règle de politique qui définit le taux d’intérêt en ajustant le rythme de croissance de la monnaie, le modèle fait preuve de super‐neutralité en régime permanent. Néanmoins, les habitudes entraînent des effets réels de liquiditéà court terme. Après un accroissement dans le taux d’intérêt nominal, l’emploi chute, ce qui entraîne un ralentissement dans l’accumulation du capital et une chute des taux d’intérêt réels à court et à long terme. L’ajustement dans le stock de capital n’est pas monotone. L’emploi et les taux d’intérêt réels à court et à long terme peuvent aussi ne pas s’ajuster de façon monotone.

Suggested Citation

  • Arman Mansoorian & Leo Michelis, 2005. "Money, capital, and real liquidity effects with habit formation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(2), pages 430-453, May.
    • Handle: RePEc:wly:canjec:v:38:y:2005:i:2:p:430-453
    DOI: 10.1111/j.0008-4085.2005.00287.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.0008-4085.2005.00287.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.0008-4085.2005.00287.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    3. Jeffrey C. Fuhrer & Michael W. Klein, 2006. "Risky Habits: on Risk Sharing, Habit Formation, and the Interpretation of International Consumption Correlations," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 722-740, September.
    4. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-1439, November.
    5. Lawrence J. Christiano & Martin S. Eichenbaum, 1992. "Liquidity effects, the monetary transmission mechanism, and monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 16(Nov), pages 2-14.
    6. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
    7. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    8. Lee E. Ohanian & Alan C. Stockman, 1995. "Theoretical issues of liquidity effects," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 3-25.
    9. Naik, Narayan Y & Moore, Michael J, 1996. "Habit Formation and Intertemporal Substitution in Individual Food Consumption," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 321-328, May.
    10. Backus, David K & Gregory, Allan W & Telmer, Chris I, 1993. "Accounting for Forward Rates in Markets for Foreign Currency," Journal of Finance, American Finance Association, vol. 48(5), pages 1887-1908, December.
    11. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-353, May.
    12. Fisher, Walter H & Turnovsky, Stephen J, 1992. "Fiscal Policy and the Term Structure of Interest Rates: An Intertemporal Optimizing Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 1-26, February.
    13. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    14. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, April.
    15. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
    16. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75(6), pages 796-796.
    17. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    18. Harl E. Ryder & Geoffrey M. Heal, 1973. "Optimal Growth with Intertemporally Dependent Preferences," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(1), pages 1-31.
    19. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-562, November.
    20. Benjamin M. Friedman, 2000. "The Role of Interest Rates in Federal Reserve Policymaking," NBER Working Papers 8047, National Bureau of Economic Research, Inc.
    21. Cohen, Daniel, 1985. "Inflation, wealth and interest rates in an intertemporal optimizing model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 73-85, July.
    22. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    23. Benjamin M. Friedman, 2000. "The role of interest rates in Federal Reserve policymaking," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 45(Oct), pages 43-66.
    24. Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 15(Win), pages 3-34.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 283-298, November.
    2. Buffie, Edward F. & Atolia, Manoj, 2012. "Resurrecting the weak credibility hypothesis in models of exchange-rate-based stabilization," European Economic Review, Elsevier, vol. 56(3), pages 361-372.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mansoorian, Arman & Michelis, Leo, 2005. "Money, habits and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1267-1285, July.
    2. Mansoorian, Arman & Neaime, Simon, 2003. "Durable goods, habits, time preference, and exchange rates," The North American Journal of Economics and Finance, Elsevier, vol. 14(1), pages 115-130, March.
    3. Mansoorian, Arman & Michelis, Leo, 2006. "The transition to a new inflation rate in models with habit formation," Economics Letters, Elsevier, vol. 91(1), pages 56-60, April.
    4. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    5. Turnovsky, Stephen J. & Monteiro, Goncalo, 2007. "Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences," European Economic Review, Elsevier, vol. 51(2), pages 479-504, February.
    6. Mansoorian Arman & Neaime Simon, 2002. "Habits And Durability In Consumption And The Effects Of Exchange Rate Policies," International Economic Journal, Taylor & Francis Journals, vol. 16(2), pages 97-114.
    7. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    8. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
    9. repec:ner:carlos:info:hdl:10016/258 is not listed on IDEAS
    10. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
    11. Pagano, Patrizio, 2004. "Habit persistence and the marginal propensity to consume in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 18(3), pages 316-329, September.
    12. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    13. Eduard Dubin & Olesya V. Grishchenko & Vasily Kartashov, 2012. "Habit formation heterogeneity: Implications for aggregate asset pricing," Finance and Economics Discussion Series 2012-07, Board of Governors of the Federal Reserve System (U.S.).
    14. Matsen, Egil, 2003. "Habit persistence and welfare gains from international asset trade," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 239-260, April.
    15. Raquel Carrasco & José M. Labeaga & J. David López-Salido, 2005. "Consumption and Habits: Evidence from Panel Data," Economic Journal, Royal Economic Society, vol. 115(500), pages 144-165, January.
    16. Havranek, Tomas & Rusnak, Marek & Sokolova, Anna, 2017. "Habit formation in consumption: A meta-analysis," European Economic Review, Elsevier, vol. 95(C), pages 142-167.
    17. Been‐Lon Chen, 2007. "Multiple BGPs in a Growth Model with Habit Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 25-48, February.
    18. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    19. João Ricardo Faria & Peter Mcadam, 2013. "Anticipation of Future Consumption: A Monetary Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2‐3), pages 423-447, March.
    20. Mansoorian, Arman, 1998. "Habits and durability in consumption, and the dynamics of the current account," Journal of International Economics, Elsevier, vol. 44(1), pages 69-82, February.
    21. Rob Alessie & Federica Teppa, 2010. "Saving and habit formation: evidence from Dutch panel data," Empirical Economics, Springer, vol. 38(2), pages 385-407, April.

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:canjec:v:38:y:2005:i:2:p:430-453. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1540-5982 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.