Catching Up with the Joneses in a Sticky Price Model

This paper examines the effect of introducing external habit formation into Calvo-type and Taylor-type sticky price models. The paper shows that external habit formation improves the performance of sticky price models in explaining the selected variables at nearly all frequencies. While each model has diverse successes and failures, the Taylor-type sticky price model seems to capture more closely the hump-shaped spectra of the selected real variables of the data than the Calvo-type sticky price model.