American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Habit Formation in Consumption and Its Implications for Monetary-Policy Models
American Economic Review
(pp. 367–390)
Abstract
This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification.Citation
Fuhrer, Jeffrey, C. 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models." American Economic Review 90 (3): 367–390. DOI: 10.1257/aer.90.3.367JEL Classification
- E52 Monetary Policy
- E21 Macroeconomics: Consumption; Saving; Wealth
- E43 Determination of Interest Rates; Term Structure of Interest Rates