Second-Order Approximation to the Rotemberg Model around a Distorted Steady State
AbstractLess is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.
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Bibliographic InfoPaper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-31.
Date of creation: 2010
Date of revision:
Price Stickiness; Rotemberg Model; Costly Price Adjustment;
Other versions of this item:
- Damjanovic, Tatiana & Nolan, Charles, 2011. "Second-order approximation to the Rotemberg model around a distorted steady state," Economics Letters, Elsevier, vol. 110(2), pages 132-135, February.
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