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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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Cited by:
  1. Lewis, Vivien & Poilly, Céline, 2012. "Firm entry, markups and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 670-685.
  2. Malikane, Christopher, 2012. "The Microfoundations of the Keynesian Wage-Price Spiral," MPRA Paper 42923, University Library of Munich, Germany, revised 2012.
  3. Guido Ascari & Efrem Castelnuovo & Lorenza Rossi, 2010. "Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation," "Marco Fanno" Working Papers 0116, Dipartimento di Scienze Economiche "Marco Fanno".
  4. 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.
  5. Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
  6. 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.
  7. Malikane, Christopher, 2013. "A New Keynesian Triangle Phillips Curve," MPRA Paper 43548, University Library of Munich, Germany.
  8. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  9. Kai Liu, 2014. "Public Finances, Business Cycles and Structural Fiscal Balances," Cambridge Working Papers in Economics 1411, Faculty of Economics, University of Cambridge.

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