A decline in the relative price of imported goods compared to that of domestically produced goods may have different effects on domestic consumption. Such effects may not be accurately detected and measured in a classical permanent-income model without considering consumption habit formation as...

We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on...

Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for 4 years on four crops, we examine...

We introduce a modification of the discounted utility model that accounts for both satiation and habit formation in intertemporal choice. Preferences depend on the satiation level and the habitual consumption level. These two state variables, together with the shape of the value function, drive...

This paper analyzes a model of discounted utility under habit formation. Habit formation means that utility in each period is determined by the difference between the received outcome and the customary outcome at that point in time. Preferences are rational, in the sense that the decision maker...

We derive a general equilibrium linear relationship between the market prices of risks and market risk aversion under a continuous time stochastic volatility model completed by liquidly traded options. The relation is robust as it is valid for both endowment and production economies, and for...

We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive...

Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In...

Standard macroeconomic models possess the undesirable feature that people stop working in the long run. Assuming standard parameters, the neoclassical model predicts that 2% of annual productivity growth leads to a 99% decline in the labor supply after 624 years. Yet, this contradicts the fact...

In this paper, the impact of interest-rate smoothing under Taylor-type rules in the context of a two-sector small open economy is considered. The normative question of whether interest-rate smoothing as a policy response is beneficial for household welfare over the business cycle of the small...