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Rule-of-Thumb Consumers and the Design of Interest Rate Rules

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  • Galí, Jordi
  • Lopez-Salido, Jose David
  • Vallés Liberal, Javier

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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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4347.

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Date of creation: Apr 2004
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Handle: RePEc:cpr:ceprdp:4347

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

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References

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