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Rule-of-Thumb Consumers, Nominal Rigidities and the Design of Interest Rate Rules

Author

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  • Sergio Ocampo Diaz

Abstract

This paper argues that, in the presence of nominal wage rigidities, the existence of Rule-of-Thumb agents and price rigidities does not cause a change in the Taylor Principle as suggested by Galí et al. (2004), and that the only rigidity relevant for this result is that faced by Rule-of-Thumb consumers. For doing so, a New-Keynesian model with Rule-of-Thumb agents is proposed. The model discriminates between both type of agents when defining wage rigidities, thus al- lowing to identify and measure the factors that affect the Taylor Principle, this also allows to drop complete markets for Rule-of-Thumb agents, and the simple use of non-separable utility functions in order to determine the incidence of the wealth effect when facing staggered wages.

Suggested Citation

  • Sergio Ocampo Diaz, 2013. "Rule-of-Thumb Consumers, Nominal Rigidities and the Design of Interest Rate Rules," Research Department Publications IDB-WP-400, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:idb-wp-400
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    Cited by:

    1. Huu Tuyen Tran, 2024. "Heterogeneous consumption behaviors and monetary policy in three ASEAN economies," International Economics and Economic Policy, Springer, vol. 21(4), pages 817-844, October.

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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