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

  • Jordi Gali
  • J. David Lopez-Salido
  • Javier Valles

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10392.

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Date of creation: Mar 2004
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Publication status: published as Gali, Jordi, J. David Lopez-Salido and Javier Valles. "Rule-of-Thumb Consumers And The Design Of Interest Rate Rules," Journal of Money, Credit and Banking, 2004, v36(4,Aug), 739-763.
Handle: RePEc:nbr:nberwo:10392
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  30. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," NBER Working Papers 10392, National Bureau of Economic Research, Inc.
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  34. repec:fth:harver:1435 is not listed on IDEAS
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