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Monetary Policy, Rule-of-Thumb Consumers and External Habits: An International Comparison

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Author Info

  • Giovanni Di Bartolomeo

    ()
    (University of Teramo)

  • Lorenza Rossi

    ()
    (University Cattolica del Sacro Cuore, Milan)

  • Massimiliano Tancioni

    ()
    (University of Rome La Sapienza)

Abstract

This 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 Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0727.

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Length: 31 pages
Date of creation: 23 Oct 2007
Date of revision:
Handle: RePEc:crt:wpaper:0727

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Related research

Keywords: Rule-of-thumb; habits; monetary policy transmission; determinacy; New Keynesian;

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Cited by:
  1. Jorge A. Fornero, 2010. "Ricardian Equivalence Proposition in a NK DSGE Model for two Large Economies: The EU and the US," Working Papers Central Bank of Chile 563, Central Bank of Chile.

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