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

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  • Jordi Galí
  • J. David López-Salido

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.

Suggested Citation

  • Jordi Galí & J. David López-Salido, 2015. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," Working Papers 104, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:104
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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