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Monetary Policy, Rule-of-Thumb Consumers and External Habits: A G7 Comparison

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  • Giovanni Di Bartolomeo

    ()
    (University of Teramo)

  • Lorenza Rossi

    ()
    (Department of Economics and Quantitative Methods, University of Pavia)

  • Massimiliano Tancioni

    ()
    (Sapienza University of Rome)

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 responses we address the empirical relevance of the different regimes and provide comparative evidence on the heterogeneity of monetary policy effects among countries.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q101.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 101.

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Length: 33 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:pav:wpaper:101

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Keywords: Rule-of-thumb; habits; monetary policy transmission; determinacy; New Keynesian DSGE model; monetary policy; Monte Carlo Bayesian estimators.;

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Cited by:
  1. Buffie, Edward F., 2013. "The Taylor principle fights back, Part I," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2771-2795.

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