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

Giovanni Di Bartolomeo (), Lorenza Rossi and Massimiliano Tancioni ()

No 101, Quaderni di Dipartimento from University of Pavia, Department of Economics and Quantitative Methods

Abstract: 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.

Keywords: Rule-of-thumb; habits; monetary policy transmission; determinacy; New Keynesian DSGE model; monetary policy; Monte Carlo Bayesian estimators. (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-07
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Journal Article: Monetary policy, rule-of-thumb consumers and external habits: a G7 comparison (2011) Downloads
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