This paper sets up a habit persistence monetary model in line with Campbell and Cochrane (1995) with transaction costs in consumption. It discusses the behavior of exchange rates and consumption as well as other variables to various shocks. This paper...
This paper sets up a habit persistence monetary model in line with Campbell and Cochrane (1995) with transaction costs in consumption. It discusses the behavior of exchange rates and consumption as well as other variables to various shocks. This paper shows that the habit persistence model fails to explain the exchange rate fluctuations and the movement of consumption due to a locally large value of relative risk aversion.