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Discretionary monetary policy in the Calvo model

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  • Willem Van Zandweghe
  • Alexander Wolman

Abstract

We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-03.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-03

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Keywords: Inflation (Finance) ; Monetary policy ; Prices;

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References

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  1. Adam, Klaus & Billi, Roberto M., 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," CFS Working Paper Series 2005/16, Center for Financial Studies (CFS).
  2. Robert G. King & Alexander L. Wolman, 2004. "Monetary discretion, pricing complementarity, and dynamic multiple equilibria," Working Paper 04-05, Federal Reserve Bank of Richmond.
  3. Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, 2002. "Expectation Traps and Monetary Policy," NBER Working Papers 8912, National Bureau of Economic Research, Inc.
  4. Michael Dotsey & Andreas Hornstein, 2008. "On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness," Working Papers 08-30, Federal Reserve Bank of Philadelphia.
  5. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "The pitfalls of discretionary monetary policy," Working Papers 01-16, Federal Reserve Bank of Philadelphia.
  6. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Doing Calvo all wrong
    by Economic Logician in Economic Logic on 2010-04-30 14:42:00
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Cited by:
  1. Gary S. Anderson & Jinill Kim & Tack Yun, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Finance and Economics Discussion Series 2010-18, Board of Governors of the Federal Reserve System (U.S.).
  2. Taisuke Nakata, 2013. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Finance and Economics Discussion Series 2013-40, Board of Governors of the Federal Reserve System (U.S.).

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