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Ali Choudhary and Young-Bae Kim
''Habit Formation: Deep and Uncertain''
( 2007, Vol. 4 No.5 )
We extend the Ravn, Schmitt-Grohe and Uribe (Review of Economic Studies, 2006) model of external deep-habits with the idea that some product varieties are more prone to habit formation than others. This s uncertainty in habit formation which affects firm's pricing. Provided that uncertainty is strong, a profound implication is that role of market frictions, such as habit formation, and its consequences for the dynamic variations in the markups can be reversed.
JEL: D1 - Household Behavior: General
E3 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Manuscript Received : Nov 02 2006 Manuscript Accepted : Feb 18 2007

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