Rule-of-thumb consumers, productivity and hours

Working paper no 48, 2007

Authors Furlanetto, Francesco; Seneca, Martin
Subject Danish Economy; Economic activity and employment
Type Working paper
Year 2007
Published 13 November 2007
In this paper we study the transmission mechanism of productivity shocks in a model with rule-of-thumb consumers. In the literature, this financial friction has been studied only with reference to fiscal shocks. We show that the presence of rule-of-thumb consumers is also very helpful in accounting for recent empirical evidence on productivity shocks. Rule-of-thumb agents, together with nominal and real rigidities, play an important role in reproducing the negative response of hours and the delayed responses of output and consumption after a productivity shock.