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

Jordi Gali (), David Lopez-Salido () and Javier Valles

No 10392, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2004-03
Note: EFG ME
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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.

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