Monetary Policy, Rule-of-Thumb Consumers and External Habits: An International Comparison
AbstractThis paper extends the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to agents who cannot smooth consumption (i.e. spenders) and are affected by external consumption habits. Although these assumptions are not new, their joint consideration strongly affects some theoretical and empirical results addressed by the recent literature. By deriving closed-form solutions, we identify different demand regimes and show that they are characterized by specific features regarding dynamic stability and monetary policy effectiveness. We also evaluate our model by stochastic simulations obtained from the Bayesian parameters estimates for the G7 economies. From posterior impulse response we address the empirical relevance of the different regimes and provide comparative evidence on the asymmetric effects of monetary policy, resulting from the heterogeneity of the estimated model structures.
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Bibliographic InfoPaper provided by University of Crete, Department of Economics in its series Working Papers with number 0727.
Length: 31 pages
Date of creation: 23 Oct 2007
Date of revision:
Rule-of-thumb; habits; monetary policy transmission; determinacy; New Keynesian;
Find related papers by JEL classification:
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-27 (All new papers)
- NEP-CBA-2007-10-27 (Central Banking)
- NEP-MAC-2007-10-27 (Macroeconomics)
- NEP-MON-2007-10-27 (Monetary Economics)
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