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Long-run Phillips Curve and Disinfation Dynamics: Calvo vs. Rotemberg Price Setting

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  • Rossi Lorenza

    () (DISCE, Università Cattolica)

  • Guido Ascari

    (Università di Pavia)

Abstract

There is widespread agreement that the two most widely used pricing assumptions in the New-Keynesian literature, i.e., Calvo and Rotemberg price-setting mechanisms, deliver equivalent dynamics. We show that, instead, they entail a very di¤erent dynamics of adjustment after a disin?ation, once non linear simulations are employed. In the Calvo model disin?ation implies output gains, while in the Rotemberg model a disin?ation experiment implies output losses. We show that this is due to the di¤erent wedges created by the nominal rigidities in the two models: between output and hours in the Calvo model, while between output and consumption in the Rotemberg model. More- over, unlike the Calvo model, in the Rotemberg model real wage rigidi- ties cause a signi?cant output slump along the adjustment path, thus restoring a dynamics in line both with the conventional wisdom and the empirical evidence.

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Paper provided by Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) in its series DISCE - Quaderni dell'Istituto di Economia e Finanza with number ief0082.

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Length: nn pages 28
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:ctc:serie3:ief0082

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Web page: http://www.unicatt.it/Istituti/EconomiaFinanza
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Keywords: Disinfation; Sticky Prices; Nonlinearities;

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References

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  1. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper 2007-24, Federal Reserve Bank of Atlanta.
  2. Guido Ascari & Christian Merkl, 2009. "Real Wage Rigidities and the Cost of Disinflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 417-435, 03.
  3. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages C45-61, May.
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  7. Olivier Blanchard & Jordi Gali, 2005. "Real Wage Rigidities and the New Keynesian Model," NBER Working Papers 11806, National Bureau of Economic Research, Inc.
  8. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  9. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  10. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
  11. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA.
  12. repec:fip:fedlpr:y:1996:i:may:p:83-107:n:v.78no.3 is not listed on IDEAS
  13. Liam Graham & Dennis J. Snower, 2004. "The real effects of money growth in dynamic general equilibrium," Working Paper Series 412, European Central Bank.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
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Cited by:
  1. Giuseppe Mastromatteo, 2011. "The Debate on the Crisis: Recent Reappraisals of the Concept of Functional Finance," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0105, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  2. Damjanovic, Tatiana & Nolan, Charles, 2010. "Second-Order Approximation to the Rotemberg Model around a Distorted Steady State," SIRE Discussion Papers 2010-31, Scottish Institute for Research in Economics (SIRE).
  3. Giuseppe Mastromatteo, 2011. "H.P. Minsky And Policies To Countervail Crises," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0102, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  4. Maria Flavia Ambrosanio & Massimo Bordignon & Floriana Cerniglia, 2008. "Constitutional reforms, fiscal decentralization and regional fiscal flows in Italy," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0084, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  5. Tatiana Damjanovic & Charles Nolan, 2009. " Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State," CDMA Working Paper Series 0907, Centre for Dynamic Macroeconomic Analysis, revised Apr 2010.

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