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Rule‐of‐Thumb Consumers Meet Sticky Wages

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  • ANDREA COLCIAGO

Abstract

It has been argued that rule‐of‐thumb consumers substantially alter the determinacy properties of interest rate rules and the dynamics of an otherwise standard New Keynesian model. In this paper, we show that nominal‐wage stickiness helps to restore standard results. The key findings are that when wages are sticky: (i) the Taylor Principle is re‐established as the necessary condition for equilibrium determinacy, and (ii) consumption rises in response to an innovation in government spending if monetary policy is characterized by interest rate smoothing and by a moderately anti‐inflationary stance. Our results help to explain the reduction in the expansionary effects of fiscal shocks observed in the United States since 1980.

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  • Andrea Colciago, 2011. "Rule‐of‐Thumb Consumers Meet Sticky Wages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(2‐3), pages 325-353, March.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:2-3:p:325-353
    DOI: 10.1111/j.1538-4616.2011.00376.x
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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