Ester Faia, Universitat Pompeu Fabra IMOP/ ECB Dynamic Macroeconomic Conference, Hydra, 11 June 2005 . ‘’Deep Habits’’ by Morten Ravn, Stephanie Schmitt Grohe and Martin Uribe. The scope of the paper . Embed habit formation for varieties into a dynamic general equilibrium model
Ester Faia, Universitat Pompeu Fabra
IMOP/ ECB Dynamic Macroeconomic Conference,
Hydra, 11 June 2005
- This effect distinguishes deep habits from superficial habits.
- This effect distinguishes deep habits from other theories of endogenous mark-up.
The endogenous mark-up also introduces a wedge between the marginal product and the marginal cost of capital hence it should also amplify asset return fluctuations
Additionally if one introduces a market for firms shares the value of a firm would vary endogenously with the mark-up
=> This is an alternative way to introduce endogenous asset price fluctuations
=> BUT this is so even in the case of superficial habits where stickiness in demand reduces the elasticity of marginal costs (hence of inflation) to output.
= > we need identifying whether inflation inertia is obtained through the introduction of past inflation or past output.