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Discretionary monetary policy in the Calvo model

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  • Willem Van Zandweghe
  • Alexander L. Wolman

Abstract

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.

Suggested Citation

  • Willem Van Zandweghe & Alexander L. Wolman, 2011. "Discretionary monetary policy in the Calvo model," Working Paper 11-03, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:11-03
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    References listed on IDEAS

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    1. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    2. Michael Dotsey & Andreas Hornstein, 2008. "On the implementation of Markov-perfect interest rate and money supply rules: global and local uniqueness," Working Papers 08-30, Federal Reserve Bank of Philadelphia.
    3. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
    4. Robert G. King & Alexander L. Wolman, 2004. "Monetary Discretion, Pricing Complementarity, and Dynamic Multiple Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 119(4), pages 1513-1553.
    5. Anderson, Gary S. & Kim, Jinill & Yun, Tack, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1572-1581, September.
    6. King, Robert G. & Wolman, Alexander L., 2004. "Monetary discretion, pricing complementarity and dynamic multiple equilibria," Working Paper Series 343, European Central Bank.
    7. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2001. "The pitfalls of discretionary monetary policy," Working Papers 01-16, Federal Reserve Bank of Philadelphia.
    8. Dotsey, Michael & Hornstein, Andreas, 2003. "Should a monetary policymaker look at money?," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 547-579, April.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Doing Calvo all wrong
      by Economic Logician in Economic Logic on 2010-04-30 19:42:00

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    Cited by:

    1. Leeper, Eric M. & Leith, Campbell & Liu, Ding, 2021. "Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 600-617.
    2. Leith, Campbell & Liu, Ding, 2016. "The inflation bias under Calvo and Rotemberg pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 283-297.
    3. Lu, Yang K. & King, Robert G. & Pasten, Ernesto, 2016. "Optimal reputation building in the New Keynesian model," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 233-249.
    4. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    5. Sunakawa, Takeki, 2015. "A quantitative analysis of optimal sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 119-135.
    6. Anderson, Gary S. & Kim, Jinill & Yun, Tack, 2010. "Using a projection method to analyze inflation bias in a micro-founded model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1572-1581, September.
    7. Bilbiie, Florin O., 2014. "Delegating optimal monetary policy inertia," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 63-78.
    8. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
    9. Ngo, Phuong V., 2014. "Optimal discretionary monetary policy in a micro-founded model with a zero lower bound on nominal interest rate," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 44-65.

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    Keywords

    Inflation (Finance); Monetary policy; Prices;
    All these keywords.

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