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Monetary Policy under Rule-of-Thumb Consumers and External Habits: An International Empirical Comparison

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Author Info
Giovanni Di Bartolomeo
Lorenza Rossi
Massimiliano Tancioni

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Abstract

This paper develops 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 which allows the analytical derivation of its dynamical and stability properties. These properties are analyzed and discussed in the light of their implications for the efficacy and the calibration of the conduct of the monetary policy. The model is then evaluated empirically, employing numerical simulations based on Monte Carlo Bayesian estimates of the structural parameters and impulse response analyses based on weakly identified SVECMs. 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 models.

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Publisher Info
Paper provided by Sapienza University of Rome, Department of Public Economics in its series Working Papers with number 97.

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Length: 52 pages
Date of creation: Nov 2006
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Handle: RePEc:sap:wpaper:97

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Related research
Keywords: Rule-of-thumb; habits; monetary policy transmission; price puzzle; DSGE New Keynesian model; monetary policy; SVECM and Monte Carlo Bayesian estimators.;

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References listed on IDEAS
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  1. Torsten Schmidt & Tobias Zimmermann, 2007. "Why are the Effects of Recent Oil Price Shocks so Small?," Ruhr Economic Papers 0029, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen. [Downloadable!]
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