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Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation

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  • Guido Ascari

    ()
    (Department of Economics and Quantitative Methods, University of Pavia)

  • Efrem Castelnuovo

    (University of Padua and Bank of Finland)

  • Lorenza Rossi

    ()
    (Department of Economics and Quantitative Methods, University of Pavia)

Abstract

This paper estimates and compares new-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes - Calvo, Rotemberg - and a positive trend inflation rate. Our empirical findings (i) support trend inflation-equipped models as better fitting during the U.S. great moderation period, (ii) provide evidence in favor of the statistical superiority of the Calvo setting, and (iii) suggest the absence of price indexation under the Calvo mechanism only. Possibly, the superiority of the Calvo model (against Rotemberg) is due to the restrictions implied by such pricing scheme for the aggregate demand equation. The determinacy regions associated to the two estimated models indicate relevant differences in the implementable simple policies. Our findings call for the development of monetary policy models consistently embedding a positive trend inflation rate and possibly based on a Calvo pricing scheme.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q108.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 108.

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Length: 35 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:pav:wpaper:108

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Keywords: Calvo; Rotemberg; trend inflation; Bayesian estimations.;

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References

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Cited by:
  1. Guido Ascari & Argia M. Sbordone, 2013. "The Macroeconomics of Trend Inflation," DEM Working Papers Series 053, University of Pavia, Department of Economics and Management.
  2. Ascari, Guido & Castelnuovo, Efrem & Rossi, Lorenza, 2011. "Calvo vs. Rotemberg in a trend inflation world: An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1852-1867.
  3. Di Bartolomeo Giovanni & Acocella Nicola & Tirelli Patrizio, 2013. "The comeback of inflation as an optimal public finance tool," wp.comunite 0100, Department of Communication, University of Teramo.
  4. Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
  5. Malikane, Christopher, 2012. "The microfoundations of the Keynesian wage-price spiral," MPRA Paper 42921, University Library of Munich, Germany, revised 29 Nov 2012.
  6. Annicchiarico, Barbara & Rossi, Lorenza, 2013. "Optimal monetary policy in a New Keynesian model with endogenous growth," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 274-285.
  7. Malikane, Christopher, 2013. "A New Keynesian Triangle Phillips Curve," MPRA Paper 43548, University Library of Munich, Germany.

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