Working Paper: NBER ID: w10392
Authors: Jordi Gal; J. 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: Rule-of-Thumb Consumers; Interest Rate Rules; Monetary Policy
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| proportion of rule-of-thumb consumers (D12) | stability of monetary policy (E63) |
| interaction of consumer types (D16) | policy effectiveness (D78) |
| inflation coefficient > 1 (E31) | stability of monetary policy (E63) |