A Look at Habit Persistence over Business Cycles

Author: Yongseung Jung

This paper sets up a Calvo-type sticky price model as well as a Taylortype
sticky price model, internal habit formation and expenditure delays as
in Bernanke et al. (1998). It shows that internal habit formation and
expenditure delays improve the sticky price models in explaining the selected
variables at nearly all frequencies. Consumption displays a hump-shaped
response to a positive monetary shock when there is a moderate habit
persistence with capital adjustment costs. However, the models have
difficulty in generating the power spectrum of interest rates and its cross
correlation with output, as seen in the data. 

Key Words: Key Words: Habit Formation, Leading Indicator, Monetary Policy,
Power Spectrum, Sticky Price

JEL Classification: E52, F31