Rule-of-Thumb Consumers and the Design of Interest Rate Rules

Jordi Gali, J. David Lopez-Salido, Javier Valles

NBER Working Paper No. 10392
Issued in March 2004
NBER Program(s):   EFG   ME

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.

(651 K)

Published: Gali, Jordi, J. David Lopez-Salido and Javier Valles. "Rule-of-Thumb Consumers And The Design Of Interest Rate Rules," Journal of Money, Credit and Banking, 2004, v36(4,Aug), 739-763.

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