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Calvo Contracts: A Critique

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  • Minford, Patrick
  • Peel, David

Abstract

The Calvo contract Phillips Curve is widely indexed for general inflation, using either core inflation or other backward-looking formulae. Such a Phillips Curve implies a high and persistent degree of nominal rigidity. It is argued here that optimal indexation would by contrast use the rational expectation of inflation. If this scheme is implemented, the relationship defaults to a familiar ‘surprise’ Phillips Curve, removing all except temporary monetary rigidity.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4288.

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Date of creation: Mar 2004
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Handle: RePEc:cpr:ceprdp:4288

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Keywords: indexing; new-keynesian synthesis; phillips curve; price stickiness; rational expectations;

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References

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  7. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
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  17. Clark, Peter B. & Goodhart, Charles A. E. & Huang, Haizhou, 1999. "Optimal monetary policy rules in a rational expectations model of the Phillips curve," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 497-520, April.
  18. Casares, Miguel, 2002. "Price setting and the steady-state effects of inflation," Working Paper Series 0140, European Central Bank.
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Citations

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Cited by:
  1. Collard, Fabrice & Dellas, Harris, 2004. "The New Keynesian Model with Imperfect Information and Learning," IDEI Working Papers 273, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Le, Vo Phuong Mai & Minford, Patrick, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
  3. Paul Levine & Joseph Pearlman & Bo Yang, 2007. "The Credibility Problem Revisited: Thirty Years on from Kydland and Prescott," School of Economics Discussion Papers 1807, School of Economics, University of Surrey.
  4. Bruchez, Pierre-Alain, 2007. "A Hybrid Sticky-Price and Sticky-Information Model," MPRA Paper 3540, University Library of Munich, Germany.

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