Habit persistence, money growth rule and real indeterminancy

Abstract

This paper studies the dynamic properties of a standard cash-in-advance model modified to include habit persistence over preferences. The central bank is assumed to follow an exogenous money growth rule. We show that equilibrium real indeterminacy is more likely to occur when habit persistence is high enough. We then establish that, in contrast to the standard CIA model, the implied sunspot dynamics may be non-oscillatory. This result is robust against alternative specifications provided the rigid CIA assumption is maintained.