Working Paper: CEPR ID: DP4347
Authors: Jordi Gal; Jose David López-Salido; Javier Valls
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: interest rate rules; rule-of-thumb consumers; sticky prices; Taylor principle
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rule-of-thumb consumers (D11) | interest rate rules (E43) |
| weight of rule-of-thumb consumers (D11) | unique equilibrium under Taylor principle (D50) |
| rule-of-thumb consumers (D11) | anti-inflationary policy (E64) |
| rule-of-thumb consumers (D11) | inflation responses range (E31) |
| share of rule-of-thumb consumers (D16) | necessity of passive rule (D72) |