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
JEL(s): E32, E52
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.