optimal monetary Policy in a new keynesian model with habits in consumption

While consumption habits have been utilised as a means of generating a hump shapedoutput response to monetary policy shocks in sticky-price New Keynesian economies,there is relatively little analysis of the impact of habits (particularly, external habits) onoptimal policy. In this paper we consider the implications of external habits for optimalmonetary policy, when those habits either exist at the level of the aggregate basket ofconsumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate anadditional distortion in the economy, which implies that the flex-price equilibrium willno longer be efficient and that policy...