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Calvo vs. Rotemberg in a trend inflation world: An empirical investigation

  • Ascari, Guido
  • Castelnuovo, Efrem
  • Rossi, Lorenza

This paper estimates and compares New-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes—Calvo (1983) and Rotemberg (1982)—under a positive trend inflation rate. Our empirical findings (i) support trend inflation as an empirically relevant feature of the U.S. great moderation; (ii) provide evidence in favor of the statistical superiority of the Calvo setting; (iii) point to a substantially lower degree of price indexation under Calvo. We show that the superiority of the Calvo model is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 11 ()
Pages: 1852-1867

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:11:p:1852-1867
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