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Internal and external habits and news-driven business cycles

By Kengo Nutahara


In many applications of habit persistence to macroeconomics, it is of little significance whether habits are internal or external. In this paper, it is shown that the distinction between internal and external habits is important in a situation wherein a shock is news about the future. An internal habit can be a source of news-driven business cycles, positive comovement in consumption, labor, investment, and output from the news about the future, whereas an external habit cannot.

Topics: E32 - Business Fluctuations; Cycles, E21 - Consumption; Saving; Wealth
Year: 2009
DOI identifier: 10.1016/j.econlet.2010.02.018
OAI identifier: oai:mpra.ub.uni-muenchen.de:19056

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