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

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  • Galí, Jordi
  • Lopez-Salido, Jose David
  • Vallés Liberal, Javier

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

  • Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," CEPR Discussion Papers 4347, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4347
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    References listed on IDEAS

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    More about this item

    Keywords

    interest rate rules; rule-of-thumb consumers; sticky prices; taylor principle;

    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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