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

Galí, Jordi, Vallés Liberal, Javier and López-Salido, J David
Authors registered in the RePEc Author Service: J. David Lopez-Salido and Jordi Galí

No 4347, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Taylor principle; Interest rate rules; Sticky prices; Rule-of-thumb consumers (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2004-04
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (149)

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Related works:
Working Paper: Rule-of-Thumb Consumers and the Design of Interest Rate Rules (2015)
Working Paper: Rule-of-Thumb Consumers and the Design of Interest Rate Rules (2004)
Working Paper: Rule-of-thumb consumers and the design of interest rate rules (2003)
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