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ON SUNSPOTS, HABITS, AND MONETARY FACTS

Published online by Cambridge University Press:  03 October 2007

STÉPHANE AURAY  and
PATRICK FÈVE
STÉPHANE AURAY
Affiliation:
Université de Lille 3 and CIRPÉE
PATRICK FÈVE
Affiliation:
University of Toulouse and Banque de France
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Abstract

This paper proposes a sunspot-based mechanism that quantitatively accounts for the main monetary facts. In particular, we propose a cash-in-advance model with habit persistence and local durability in consumption decisions. In this context, when habit persistence is strong enough, there is real indeterminacy. We show that when sunspots positively correlate with money injections, the model generates a persistent response of inflation, a hump-shaped response of output, and the price puzzle. We then apply the model to the U.S data and we show that it performs well in reproducing the monetary transmission mechanism and the price puzzle in the short run.

Keywords

Habit PersistenceCash-in-AdvanceReal IndeterminacySunspotsLiquidity EffectPrice Puzzle
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Issue 1 , February 2008 , pp. 72 - 96
Copyright
© 2007 Cambridge University Press

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