Habit Formation and the Persistence of Monetary Shocks

This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. This paper constructs and estimates a general equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated via Maximum Likelihood using US data on output, the real money stock, and the nominal interest rate. Econometric results suggest that habit formation and adjustment costs to capital play an important role in explaining the output effects of monetary policy. In particular, impulse response analysis indicates that the model generates persistent, hump-shaped output responses to monetary shocks.

Can a habit formation model really explain the Forward Premium Anomaly?

Verdelhan (2009) mostra que desejando-se explicar o comporta- mento do prêmio de risco nos mercados de títulos estrangeiros usando- se o modelo de formação externa de hábitos proposto por Campbell e Cochrane (1999) será necessário especi car o retorno livre de risco de equilíbrio de maneira pró-cíclica. Mostramos que esta especi cação só é possível sobre parâmetros de calibração implausíveis. Ainda no processo de calibração, para a maioria dos parâmetros razoáveis, a razão preço-consumo diverge. Entretanto, adotando a sugestão pro- posta por Verdelhan (2009) - de xar a função sensibilidade (st) no seu valor de steady-state durante a calibração e liberá-la apenas du- rante a simulação dos dados para se garantir taxas livre de risco pró- cíclicas - conseguimos encontrar um valor nito e bem comportado para a razão preço-consumo de equilíbrio e replicar o foward premium anom- aly. Desconsiderando possíveis inconsistências deste procedimento, so- bre retornos livres de risco pró-cíclicos, conforme sugerido por Wachter (2006), o modelo utilizado gera curvas de yields reais decrescentes na maturidade, independentemente do estado da economia - resultado que se opõe à literatura subjacente e aos dados reais sobre yields.

Crime and punishment with habit formation

Moral concepts affect crime supply. This idea is modelled assuming that illegal activities is habit forming. We introduce habits in a intertemporal general equilibrium framework to illegal activities and compare its outcomes with a model without habit formation. The findings are that habit and crime presents a non linear relationship that hinges upon the level of capital and habit formation. It is possible to show that while the effect of habit on crime is negative for low levels o habit formation it becomes positive as habits goes up. Secondly habit reduces the marginal effect of illegal activities return on crime. Finally, the effect of habit on crime depends positively on the amount of capital. This could explain the relationship between size of cities and illegal activity.

Can a habit formation model really explain the forward premium anomaly?

Verdelhan (2009) shows that if one is to explain the foreign exchange forward premium behavior using Campbell and Cochrane (1999)’s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane’s framework under implausible parameters specifications given that the price-consumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan’s shortcut of fixing the sensivity function λ(st) at its steady state level to attain a finite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with procyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data.

Visual habit formation in monkeys with neurotoxic lesions of the ventrocaudal neostriatum

Visual habit formation in monkeys, assessed by concurrent visual discrimination learning with 24-h intertrial intervals (ITI), was found earlier to be impaired by removal of the inferior temporal visual area (TE) but not by removal of either the medial temporal lobe or inferior prefrontal convexity, two of TE's major projection targets. To assess the role in this form of learning of another pair of structures to which TE projects, namely the rostral portion of the tail of the caudate nucleus and the overlying ventrocaudal putamen, we injected a neurotoxin into this neostriatal region of several monkeys and tested them on the 24-h ITI task as well as on a test of visual recognition memory. Compared with unoperated monkeys, the experimental animals were unaffected on the recognition test but showed an impairment on the 24-h ITI task that was highly correlated with the extent of their neostriatal damage. The findings suggest that TE and its projection areas in the ventrocaudal neostriatum form part of a circuit that selectively mediates visual habit formation.

Individual differences and family resemblances in animal behavior, a study of habit formation in various strains of mice,

Published also as thesis (PH. D.) Columbia University, 1918.

Consumption habit and international stock returns

We use the consumption-based asset pricing model with habit formation to study the predictability and cross-section of returns from the international equity markets. We find that the predictability of returns from many developed countries' equity markets is explained in part by changing prices of risks associated with consumption relative to habit at the world as well as local levels. We also provide an exploratory investigation of the cross-sectional implications of the model under the complete world market integration hypothesis and find that the model performs mildly better than the traditional consumption-based model. the unconditional and conditional world CAPMs and a three-factor international asset pricing model. (C) 2004 Elsevier B.V. All rights reserved.

Roles of forced nicotine exposure and Comt gene disruption in the development of addiction-related behavioural and neurochemical changes in mice

Activation of midbrain dopamine systems is thought to be critically involved in the addictive properties of abused substances. Drugs of abuse increase dopamine release in the nucleus accumbens and dorsal striatum, which are the target areas of mesolimbic and nigrostriatal dopamine pathways, respectively. Dopamine release in the nucleus accumbens is thought to mediate the attribution of incentive salience to rewards, and dorsal striatal dopamine release is involved in habit formation. In addition, changes in the function of prefrontal cortex (PFC), the target area of mesocortical dopamine pathway, may skew information processing and memory formation such that the addict pays an abnormal amount of attention to drug-related cues. In this study, we wanted to explore how long-term forced oral nicotine exposure or the lack of catechol-O-methyltransferase (COMT), one of the dopamine metabolizing enzymes, would affect the functioning of these pathways. We also wanted to find out how the forced nicotine exposure or the lack of COMT would affect the consumption of nicotine, alcohol, or cocaine. First, we studied the effect of forced chronic nicotine exposure on the sensitivity of dopamine D2-like autoreceptors in microdialysis and locomotor activity experiments. We found that the sensitivity of these receptors was unchanged after forced oral nicotine exposure, although an increase in the sensitivity was observed in mice treated with intermittent nicotine injections twice daily for 10 days. Thus, the effect of nicotine treatment on dopamine autoreceptor sensitivity depends on the route, frequency, and time course of drug administration. Second, we investigated whether the forced oral nicotine exposure would affect the reinforcing properties of nicotine injections. The chronic nicotine exposure did not significantly affect the development of conditioned place preference to nicotine. In the intravenous self-administration paradigm, however, the nicotine-exposed animals self-administered nicotine at a lower unit dose than the control animals, indicating that their sensitivity to the reinforcing effects of nicotine was enhanced. Next, we wanted to study whether the Comt gene knock-out animals would be a suitable model to study alcohol and cocaine consumption or addiction. Although previous work had shown male Comt knock-out mice to be less sensitive to the locomotor-activating effects of cocaine, the present study found that the lack of COMT did not affect the consumption of cocaine solutions or the development of cocaine-induced place preference. However, the present work did find that male Comt knock-out mice, but not female knock-out mice, consumed ethanol more avidly than their wild-type littermates. This finding suggests that COMT may be one of the factors, albeit not a primary one, contributing to the risk of alcoholism. Last, we explored the effect of COMT deficiency on dorsal striatal, accumbal, and prefrontal cortical dopamine metabolism under no-net-flux conditions and under levodopa load in freely-moving mice. The lack of COMT did not affect the extracellular dopamine concentrations under baseline conditions in any of the brain areas studied. In the prefrontal cortex, the dopamine levels remained high for a prolonged time after levodopa treatment in male, but not female, Comt knock-out mice. COMT deficiency induced accumulation of 3,4-dihydroxyphenylacetic acid, which increased further under levodopa load. Homovanillic acid was not detectable in Comt knock-out animals either under baseline conditions or after levodopa treatment. Taken together, the present results show that although forced chronic oral nicotine exposure affects the reinforcing properties of self-administered nicotine, it is not an addiction model itself. COMT seems to play a minor role in dopamine metabolism and in the development of addiction under baseline conditions, indicating that dopamine function in the brain is well-protected from perturbation. However, the role of COMT becomes more important when the dopaminergic system is challenged, such as by pharmacological manipulation.

The New Keynesian Monetary Model: Does it Show the Comovement Between Output and Inflation in the U.S.?

Published as article in: Journal of Economic Dynamics and Control (2008), 32(May), pp. 1466-1488.

Data Revisions in the Estimation of DSGE Models

Revisions of US macroeconomic data are not white-noise. They are persistent, correlated with real-time data, and with high variability (around 80% of volatility observed in US real-time data). Their business cycle effects are examined in an estimated DSGE model extended with both real-time and final data. After implementing a Bayesian estimation approach, the role of both habit formation and price indexation fall significantly in the extended model. The results show how revision shocks of both output and inflation are expansionary because they occur when real-time published data are too low and the Fed reacts by cutting interest rates. Consumption revisions, by contrast, are countercyclical as consumption habits mirror the observed reduction in real-time consumption. In turn, revisions of the three variables explain 9.3% of changes of output in its long-run variance decomposition.

Changes in consumer tastes in the demand for fish and meat in Malaysia

In this article the demand for fish and its substitute was estimated using a very flexible demand function, the Almost Ideal Demand System (AIDS) developed by Deaton and Muelllbaeur (1980), incorporating the habit formation variable to measure the impact of the changes in tastes in comsumer demand for fish and meat products from 1960 to 1990 in Malaysia. Information on price and income elasticities for these meat groups was also obtained. To incorporate consumption habit variables, the dynamic translating procedure proposed by Pollak (1970) and Pollak and Wales (1981) has been adopted. The overall results of the maximum likelihood estimates of the dynamic AIDS model are quite good where 19 of 30 coefficients are significantly different from zero and the minimum budget shares, the constant, are between zero and one for each meat type. Consumers tend to purchase and consume fish, chicken, and pork almost daily. Beef and mutton are only consumed occassionally since they are relatively more expensive. This finding is consistent with the trend observed in the per capita consumption and budget share where fish, chicken, and pork tended to dominate over beef and mutton from 1960 to 1990.

The price of pain and the value of suffering.

Estimating the financial value of pain informs issues as diverse as the market price of analgesics, the cost-effectiveness of clinical treatments, compensation for injury, and the response to public hazards. Such valuations are assumed to reflect a stable trade-off between relief of discomfort and money. Here, using an auction-based health-market experiment, we show that the price people pay for relief of pain is strongly determined by the local context of the market, that is, by recent intensities of pain or immediately disposable income (but not overall wealth). The absence of a stable valuation metric suggests that the dynamic behavior of health markets is not predictable from the static behavior of individuals. We conclude that the results follow the dynamics of habit-formation models of economic theory, and thus, this study provides the first scientific basis for this type of preference modeling.