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

Sergio Ocampo

No IDB-WP-400, Research Department Publications from Inter-American Development Bank, Research Department

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.

JEL-codes: C68 E32 E37 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-mac and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Rule-of-Thumb Consumers, Nominal Rigidities and the Design of Interest Rate Rules (2013)
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