Internal and External Habits Formation: Policy Analysis Implications and Bayesian Estimation

Abstract

The Euler equation relies on strictly and rigid assumptions and it has been proved that consumers do not follow this equation in real data. One way to improve this consumption expression is introducing the hypothesis of Habit formations, which re-

ect the idea of non-time separable preferences. In this study, I show which are the consequences in policy analysis of working with habits persistence in a New Keynesian DSGE model, comparing the results coming from di erent ways of modelling habits formation. Moreover, I undertake an estimation of the new parameters through a Bayesian approach deploying Swedish aggregate data in order to provide a guide for future model calibration.