Zubairy, Sarah (2010): Deep Habits, Nominal Rigidities and Interest Rate Rules.
Download (230Kb) | Preview
This paper explores how the introduction of deep habits in a standard new-Keynesian model affects the properties of widely used interest rate rules. In particular, an interest rate rule satisfying the Taylor principle is no longer a su±cient condition to guarantee determinacy. Including interest rate smoothing and a response to output deviations from steady state significantly improve the regions of determinacy. However, under all the simple interest rate rules considered here with contemporaneous variables, determinacy is not guaranteed for very high degree of deep habits. The intuition behind these findings is tied to how deep habits give rise to counter-cyclical markups, a property that makes it an appealing feature in the study of demand shocks.
|Item Type:||MPRA Paper|
|Original Title:||Deep Habits, Nominal Rigidities and Interest Rate Rules|
|Keywords:||Taylor principle, interest rate rules, sticky prices, deep habits|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Sarah Zubairy|
|Date Deposited:||23. Oct 2010 14:07|
|Last Modified:||14. Feb 2013 01:19|
Clarida, Richard, Jordi Gali and Mark Gertler (2000), Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. Quarterly Journal of Economics, 115, 147-180.
Gali, Jordi, David Lopez-Salido and Javier Valles (2004), Rule-of-Thumb Consumers and the Design of Interest Rate Rules. Journal of Money, Credit and Banking, 36(4), 739-763.
Leith, Campbell, Ioana Moldovan and Ra®aele Rossi (2009), Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption. Working Paper Series 1076, European Central Bank.
Orphanides, Athanasios (2001), Monetary Policy Rules Based on Real-Time Data. American Economic Review, 91, 964-985.
Ravn, Morten, Stephanie Schmitt-Grohe and Martin Uribe (2006), Deep Habits. Review of Economic Studies, 73, 195-218.
Sveen, Tommy and Lutz Weinke (2005), New Perspectives on Capital, Sticky Prices and the Taylor Principle. Journal of Economic Theory, 123, 21-39.
Taylor, John (1993), Discretion Versus Policy Rules in Practice. Carnegie-Rochester Series on Public Policy, 39, 195-214.
Taylor, John (1999), Monetary Policy Rules. University of Chicago Press, Chicago.
Woodford, Michael (2001), The Taylor Rule and Optimal Monetary Policy. American Economic Review, 91, 232-237.
Zubairy, Sarah (2009), Explaining the Effects of Government Spending Shocks. Manuscript, Duke University.