Investigation Of The Role Of Degree Of Habit Persistence In Consumption Changes In Derivation Of Optimal Monetary And Fiscal Policies In The Ramsey Problem Framework

Document Type : Research Paper

Author

Associate Professor of Department of Economics, Faculty of Management and Humanities, Chabahar Maritime University, Sistan and Baluchestan, Iran

10.22051/ieda.2025.50740.1465

Abstract

This paper attempts to present a model that can investigate the effect of the degree of habit persistence in consumption changes of households in the derivation of optimal monetary and fiscal policies in the Ramsey problem framework for the Iranian economy. To this end, this research, with a glance at the existing economic literature, will present a dynamic stochastic general equilibrium model for an open economy in which, while diversifying the habit persistence variable in the utility function, the optimal policies are introduced as a result of the model. The results indicate that in the presence of sticky prices, zero inflation and close to zero emerge as optimal outcomes. Also, the negative tax rate on capital return is presented as a result of the optimal policy in this model. Since the consumer's behavioral habit is intermittently dependent on the consumer's lagged consumption, increasing the habit persistence parameter in consumption will lead to an increase in consumption and consequently an increase in utility, and therefore inflation begins to rise. In fact, any policy that increases the habit persistence parameter in consumption for the people of the community will lead to an increase in consumption in order to increase the utility of the household, and finally, this increase in the degree of habit persistence in household consumption will increase the rate of inflation.

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References

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Iranian Economic Development Analyses
Volume 10, Issue 2
October 2024

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