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

42 Pages Posted: 13 May 2004

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

David Lopez-Salido

Board of Governors of the Federal Reserve System

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

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: Taylor principle, interest rate rules, sticky prices, rule-of-thumb consumers

JEL Classification: E32, E52

Suggested Citation

Gali, Jordi and Lopez-Salido, David and Vallés, Javier, Rule-of-Thumb Consumers and the Design of Interest Rate Rules (April 2004). CEPR Discussion Paper No. 4347. Available at SSRN: https://ssrn.com/abstract=541241

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2754 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Cambridge, MA 02142
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Javier Vallés

Government of the Kingdom of Spain - Economic Bureau of the President ( email )

28071 Madrid
Spain

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