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Welfare implications of Calvo vs. Rotemberg pricing assumptions

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Author Info
Giovanni Lombardo () (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
David Vestin () (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)

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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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Paper provided by European Central Bank in its series Working Paper Series with number 770.

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Length: 18 pages
Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070770

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

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  2. Estelle Cantillon & Pai-Ling Yin, 2007. "How and when do markets tip? Lessons from the Battle of the Bund," Working Paper Series 766, European Central Bank. [Downloadable!]
  3. Frederic Boissay & Reint Gropp, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series 753, European Central Bank. [Downloadable!]
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  4. Paul Levine & Joseph Pearlman & Richard Pierse, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series 759, European Central Bank. [Downloadable!]
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  5. Michiel van Leuvensteijn & Jacob Bikker & Adrian van Rixtel & Christoffer Kok-Sorensen, 2007. "A new approach to measuring competition in the loan markets of the euro area," DNB Working Papers 143, Netherlands Central Bank, Research Department. [Downloadable!]
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  6. Luca Benati & Haroon Mumtaz, 2007. "U.S. evolving macroeconomic dynamics - a structural investigation," Working Paper Series 746, European Central Bank. [Downloadable!]
  7. Jukka Jalava & Ilja Kristian Kavonius, 2007. "Durable goods and their effect on household saving rations in the euro area," Working Paper Series 755, European Central Bank. [Downloadable!]
  8. Ana Lamo & Javier J. Pérez & Ludger Schuknecht, 2007. "The cyclicality of consumption, wages and employment of the public sector in the euro area," Working Paper Series 757, European Central Bank. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luigi Landolfo, 2007. "Modeling the impact of external factors on the euro area’s HICP and real economy - a focus on pass-through and the trade balance," Working Paper Series 789, European Central Bank. [Downloadable!]
  2. Nikolaus Siegfried & Emilia Simeonova & Cristina Vespro, 2007. "Choice of currency in bond issuance and the international role of currencies," Working Paper Series 814, European Central Bank. [Downloadable!]
  3. Jiri Podpiera, 2007. "Policy rate decisions and unbiased parameter estimation in typical monetary policy rules," Working Paper Series 771, European Central Bank. [Downloadable!]
  4. Gabriel Fagan & Julián Messina, 2009. "Downward wage rigidity and optimal steady-state inflation," Working Paper Series 1048, European Central Bank. [Downloadable!]
  5. Paul Levine & Peter McAdam & Joseph Pearlman & Richard Pierse, 2008. "Risk Management in Action. Robust monetary policy rules under structured uncertainty," Working Paper Series 870, European Central Bank. [Downloadable!]
  6. Campbell Leith & Ioana Moldovan & Raffaele Rossi, 2009. "Monetary and fiscal policy under deep habits," Working Papers 2009_32, Department of Economics, University of Glasgow. [Downloadable!]
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  7. Antje Berndt & Iulian Obreja, 2007. "The pricing of risk in European credit and corporate bond markets," Working Paper Series 805, European Central Bank. [Downloadable!]
  8. Maarten Dossche, 2009. "Understanding inflation dynamics : Where do we stand ?," Research series 200906-11, National Bank of Belgium. [Downloadable!]
  9. Andrew T. Levin & J. David López-Salido & Edward Nelson & Tack Yun, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Working Papers 2008-035, Federal Reserve Bank of St. Louis. [Downloadable!]
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