It has been argued that rule-of-thumb consumers substantially alter the determinacy properties of interest rate rules and the dynamics of an otherwise standard New Keynesian model. In this paper, we show that nominal-wage stickiness helps to restore standard results. The key findings are that when wages are sticky: (i) the Taylor Principle is re-established as the necessary condition for equilibrium determinacy, and (ii) consumption rises in response to an innovation in government spending if monetary policy is characterized by interest rate smoothing and by a moderately anti-inflationary stance. Our results help to explain the reduction in the expansionary effects of fiscal shocks observed in the United States since 1980. © 2011 The Ohio State University

Colciago, A. (2011). Rule-of-Thumb Consumers Meet Sticky Wages. JOURNAL OF MONEY, CREDIT, AND BANKING, 43(2-3), 325-353 [10.1111/j.1538-4616.2011.00376.x].

Rule-of-Thumb Consumers Meet Sticky Wages

COLCIAGO, ANDREA
Primo
2011

Abstract

It has been argued that rule-of-thumb consumers substantially alter the determinacy properties of interest rate rules and the dynamics of an otherwise standard New Keynesian model. In this paper, we show that nominal-wage stickiness helps to restore standard results. The key findings are that when wages are sticky: (i) the Taylor Principle is re-established as the necessary condition for equilibrium determinacy, and (ii) consumption rises in response to an innovation in government spending if monetary policy is characterized by interest rate smoothing and by a moderately anti-inflationary stance. Our results help to explain the reduction in the expansionary effects of fiscal shocks observed in the United States since 1980. © 2011 The Ohio State University
No
Articolo in rivista - Articolo scientifico
Scientifica
Determinacy; Fiscal shocks; Rule-of-thumb consumers; Sticky wages
English
325
353
29
Colciago, A. (2011). Rule-of-Thumb Consumers Meet Sticky Wages. JOURNAL OF MONEY, CREDIT, AND BANKING, 43(2-3), 325-353 [10.1111/j.1538-4616.2011.00376.x].
Colciago, A
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10281/63242
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