An optimizing model for monetary policy analysis: can habit formation help?

This paper discusses a rigorous empirical standard for monetary policy models. The motivation for this discussion is that, if one wishes to conduct welfare analysis , one must be reasonably confident that the model provides a good approximation to underlying consumer and firm behavior over the monetary policy horizon, i.e., in the short-run. The paper examines a specific alternative to the standard consumption model in which consumers' utility depends in part on current consumption relative to past consumption.