DP4347 Rule-of-Thumb Consumers and the Design of Interest Rate Rules
|Author(s):||Jordi Galí, Jose David Lopez-Salido, Javier Vallés Liberal|
|Publication Date:||April 2004|
|Keyword(s):||interest rate rules, rule-of-thumb consumers, sticky prices, taylor principle|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=4347|
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.