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Rule-of-thumb consumers and the design of interest rate rules

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  • Jordi Galí

    ()
    (Centre de Recerca en Economia Internacional)

  • J. David López Salido

    ()
    (Banco de España)

  • Javier Vallés

    ()
    (Banco de España)

Abstract

We introduce rule-of-thumb consumers in an otherwise standard dynamic sticky price model, and show how their presence can change dramatically the properties of widely used interest rate rules. In particular, the existence of a unique equilibrium is no longer guaranteed by an interest rate rule that satisfies the so called Taylor principle. Our findings call for caution when using estimates of interest rate rules in order to assess the merits of monetary policy in specific historical periods.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/03/Fic/dt0320e.pdf
File Function: First version, January 2004
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0320.

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Length: 42 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:bde:wpaper:0320

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Keywords: Taylor principle; interest rate rules; sticky prices; rule-of-thumb consumers;

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References

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  1. Jordi Galí & J. David López-Salido & Javier Vallés, 2002. "Understanding the effects of government spending on consumption," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 911, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
  3. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," NBER Working Papers 7571, National Bureau of Economic Research, Inc.
  4. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3211, C.E.P.R. Discussion Papers.
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  8. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1105-1129, September.
  9. Jeffery D. Amato & Thomas Laubach, 2002. "Rule-of-thumb behaviour and monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-5, Board of Governors of the Federal Reserve System (U.S.).
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  17. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," NBER Working Papers 10392, National Bureau of Economic Research, Inc.
  18. Jordi Galí & J. David Pérez-Salido, 2003. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," Working Papers 104, Barcelona Graduate School of Economics.
  19. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(2), pages 329-359, April.
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  21. Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998. "The Perils of Taylor Rules," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-37, C.V. Starr Center for Applied Economics, New York University.
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