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Welfare implications of Calvo vs. Rotemberg pricing assumptions

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  • Lombardo, Giovanni
  • Vestin, David

Abstract

This paper compares the welfare implications of two widely used pricing assumptions in the New-Keynesian literature: Calvo-pricing vs. Rotemberg-pricing. We show that despite the strong similarities between the two assumptions to a first order of approximation, in general they might entail different welfare costs at higher order of approximation. In the special case of non-distorted steady state, the two pricing assumptions imply identical welfare losses to a second order of approximation. JEL Classification: E3, E5

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0770.

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Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070770

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Keywords: Calvo price adjustment; inflation; Rotemberg price adjustment; second-order approximation; Welfare;

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