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How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley

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Author Info
Dixon, Huw
Kara, Engin

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Abstract

In a recent paper, Michael Kiley argued that the Calvo model of price adjustment is both quantitatively and qualitatively different from the Taylor model. What we show is that Kiley (along with most other people) are choosing the wrong parameterization to compare the two models. In effect they are comparing the average age of Calvo contracts with the completed length of Taylor contracts. When we compare the average age of Taylor contracts with the average of Calvo, the differences become much smaller and easier to understand. We also show that autocorrelation of output can be larger in a Taylor economy than in the age-equivalent Calvo economy.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0055
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File Function: full text
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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 4 (June)
Pages: 1119-1126
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:1119-1126

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Huw Dixon, 2007. "The distribution of contract durations across firms: a unified framework for understanding and comparing dynamic wage and price setting models," Money Macro and Finance (MMF) Research Group Conference 2006 148, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  2. Dixon, Huw & Kara, Engin, 2007. "Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts," Cardiff Economics Working Papers E2007/1, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  3. Rochelle M. Edge & Thomas Laubach & John C. Williams, 2007. "Welfare-maximizing monetary policy under parameter uncertainty," Working Paper Series 2007-11, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  4. Dixon, Huw & Kara, Engin, 2008. "Can we explain inflation persistence in a way that is consistent with the micro-evidence on nominal rigidity?," Cardiff Economics Working Papers E2008/22, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  5. Engin Kara & Huw Dixon, 2005. "Persistence and Nominal Inertia in a Generalised Taylor Economy: How Loner Contracts Dominate Shorter Contracts," Money Macro and Finance (MMF) Research Group Conference 2005 82, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  6. Engin Kara, 2006. "Optimal monetary policy in the generalized Taylor economy," Working Paper Series 673, European Central Bank. [Downloadable!]
  7. Paustian, Matthias & von Hagen, Jürgen, 2008. "The Role of Contracting Schemes for Assessing the Welfare Costs of Nominal Rigidities," CEPR Discussion Papers 6726, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Gregory de Walque & Frank Smets & Rafael Wouters, 2006. "Firm-specific production factors in a DSGE model with Taylor price setting," Working Paper Series 648, European Central Bank. [Downloadable!]
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  9. Gautier, E., 2008. "Les ajustements microéconomiques des prix : une synthèse des modèles théoriques et résultats empiriques," Documents de Travail 211, Banque de France. [Downloadable!]
  10. Zuzana Janko, 2008. "Nominal Wage Contracts, Labor Adjustment Costs and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 434-448, April. [Downloadable!] (restricted)
  11. Huw Dixon & Engin Kara, 2006. "Understanding inflation persistence - a comparison of different models," Working Paper Series 672, European Central Bank. [Downloadable!]
  12. Matthias Paustian, 2005. "The role of contracting schemes for the welfare costs of nominal rigidities," Computing in Economics and Finance 2005 196, Society for Computational Economics. [Downloadable!]
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