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Monetary Policy, Rule-of-Thumb Consumers and External Habits: A G7 Comparison

  • Giovanni Di Bartolomeo

    ()

    (University of Teramo)

  • Lorenza Rossi

    ()

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Massimiliano Tancioni

    ()

    (Sapienza University of Rome)

This paper extends the standard New Keynesian dynamic stochastic general equilibrium (DSGE) model to agents who cannot smooth consumption (i.e. spenders) and are affected by external consumption habits. Although these assumptions are not new, their joint consideration strongly affects some theoretical and empirical results addressed by the recent literature. By deriving closed-form solutions, we identify different demand regimes and show that they are characterized by specific features regarding dynamic stability and monetary policy effectiveness. We also evaluate our model by stochastic simulations obtained from the Bayesian parameters estimates for the G7 economies. From posterior impulse responses we address the empirical relevance of the different regimes and provide comparative evidence on the heterogeneity of monetary policy effects among countries.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q101.pdf
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Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 101.

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Length: 33 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:pav:wpaper:101
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  2. Campbell, John Y & Mankiw, N Gregory, 1990. "Permanent Income, Current Income, and Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(3), pages 265-79, July.
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  18. Peter N. Ireland, 1999. "A Method for Taking Models to the Data," Boston College Working Papers in Economics 421, Boston College Department of Economics.
  19. Jeffery D. Amato & Thomas Laubach, 2002. "Rule-of-thumb behaviour and monetary policy," Finance and Economics Discussion Series 2002-5, Board of Governors of the Federal Reserve System (U.S.).
  20. Giovanni Di Bartolomeo & Lorenza Rossi, 2007. "Heterogeneous Consumers, Demand Regimes, Monetary Policy and Equilibrium Determinacy," Rivista di Politica Economica, SIPI Spa, vol. 97(5), pages 111-142, September.
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  26. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
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