Consumption dynamics in general equilibrium

This paper explores the role of consumption habits using an estimated nonlinear dynamic stochastic general equilibrium (DSGE) model with heteroscedastic shocks. It finds that habits interact with time-varying volatility to produce a better and more plausible fit to the data. They accentuate the nonlinear character of the simple New Keynesian model to produce asymmetries between positive and negative shocks. In general equilibrium, these effects are transmitted as much through inflation as through consumption itself