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Persistence and nominal inertia in a generalized Taylor economy: how longer contracts dominate shorter contracts

  • Dixon, Huw
  • Kara, Engin

In this paper we develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. We are able to solve the puzzle of why Calvo contracts appear to be more persistent than simple Taylor contracts: it arises because of the distribution of contract lengths. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner. JEL Classification: E50, E24, E32, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 0489.

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Date of creation: May 2005
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Handle: RePEc:ecb:ecbwps:20050489
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