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Second-Order Approximation to the Rotemberg Model around a Distorted Steady State

  • Damjanovic, Tatiana
  • Nolan, Charles

Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.

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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-31.

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Date of creation: 2010
Date of revision:
Handle: RePEc:edn:sirdps:163
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  1. Tatiana Damjanovic & Charles Nolan, 2008. "Seigniorage-maximizing inflation," CDMA Working Paper Series 200807, Centre for Dynamic Macroeconomic Analysis.
  2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
  3. BOUAKEZ, Hafedh & CARDIA, Emanuela & RUGE-MURCIA, Francisco J., 2005. "The Transmission of Monetary Policy in a Multi-Sector Economy," Cahiers de recherche 20-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Pierpaolo Benigno & Michael Woodford, 2005. "Inflation Stabilization And Welfare: The Case Of A Distorted Steady State," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1185-1236, December.
  5. Tatiana Damjanovic & Charles Nolan, 2010. "Seigniorage-Maximizing Inflation under Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(2-3), pages 503-519, 03.
  6. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  7. Rossi Lorenza & Guido Ascari, 2008. "Long-run Phillips Curve and Disinfation Dynamics: Calvo vs. Rotemberg Price Setting," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0082, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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