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Discretionary monetary policy in the Calvo model

  • Willem Van Zandweghe
  • Alexander Wolman

We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-03.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-03
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  1. Stefania Albanesi & V.V. Chari & Lawrence J. Christiano, . "Expectation Traps and Monetary Policy," Working Papers 198, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "The pitfalls of discretionary monetary policy," Working Papers 01-16, Federal Reserve Bank of Philadelphia.
  3. Robert G. King & Alexander L. Wolman, 2004. "Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 119(4), pages 1513-1553, November.
  4. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
  5. Michael Dotsey & Andreas Hornstein, 2011. "On the implementation of Markov-Perfect interest rate and money supply rules : global and local uniqueness," Working Paper 09-06, Federal Reserve Bank of Richmond.
  6. Klaus Adam & Roberto M. Billi, 2005. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Research Working Paper RWP 05-08, Federal Reserve Bank of Kansas City.
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