Open Access Te Herenga Waka-Victoria University of Wellington
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An Investigation into Rule of Thumb Behaviour in New Zealand

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posted on 2021-11-10, 19:12 authored by Malanchak, Adam

In recent times, macroeconomic models have begun to describe aggregate consumer and firm behaviour by allowing some proportion to behave in a rule of thumb manner. This dissertation attempts to address two main issues that are concurrent in the literature. First I test for the proportion of aggregate behaviour that deviates from Classical consumer allocation theory and New Keynesian firm pricing theory in New Zealand. Rule of thumb consumers are assumed to consume out of current income as opposed to obeying the Permanent Income Hypothesis, while rule of thumb firms set prices in a backward looking manner. Using the GMM estimation procedure, I examine the sensitivity of estimates across a range of instrumental variables. After positive GMM specification tests I find the proportion of rule of thumb consumers is 0.21 and the proportion of backward looking price setters is 0.82. These results suggest that specifications which fail to allow for rule of thumb behaviour cannot fully reflect consumer and firm decisions. The second main issue seeks to address how these estimates compare to those estimated in a small open economy DSGE model. Monte Carlo Markov Chain (MCMC) estimation finds an estimated degree of external habit persistence of 0.9, proportion of rule of thumb consumers of 0.34, and the proportion of backward looking price setters falls to 0.7. A full range of MCMC diagnostics is subsequently computed. The diagnostic tests are largely favourable.

History

Copyright Date

2010-01-01

Date of Award

2010-01-01

Publisher

Te Herenga Waka—Victoria University of Wellington

Rights License

Author Retains Copyright

Degree Discipline

Economics

Degree Grantor

Te Herenga Waka—Victoria University of Wellington

Degree Level

Masters

Degree Name

Master of Commerce and Administration

Victoria University of Wellington Item Type

Awarded Research Masters Thesis

Language

en_NZ

Victoria University of Wellington School

School of Economics and Finance

Advisors

McDermott, John; Hall, Viv