Taylor Rule Under Rule-of-Thumb Consumers and External Habits: An International Comparison
29 Pages Posted: 27 Jul 2006
Date Written: July 2006
This paper develops and estimates a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with rule-of-thumb consumers and external habits. Our theoretical model has a closed-form solution that allows us to derive its dynamical and stability properties. The model is also evaluated by running numerical simulations based on Monte Carlo Bayesian estimates of the structural parameters. The estimates are repeated for each of the G7 national economies. Providing single country estimates and simulations, we derive some indications on the relative efficacy of monetary policy and of its potential asymmetric effects resulting from the heterogeneity of the estimated model structures.
Keywords: Rule-of-thumb, habits, monetary policy transmission, determinacy, New Keynesian DSGE model, monetary policy, Monte Carlo Bayesian estimators
JEL Classification: C11, C13, E32, E52
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