Habit Formation, Interest-Rate Control and Equilibrium Determinacy

We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive mon-etary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity