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Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation

  • Guido Ascari


    (Università di Pavia)

  • Efrem Castelnuovo


    (Università di Padova)

  • Lorenza Rossi


    (Università di Pavia)

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) support the absence of price indexation under the Calvo mechanism only. The superiority of the Calvo model (against Rotemberg) is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation. The determinacy regions implied by the two estimated models indicate relevant differences in the implementable simple policy rules.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0116.

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Length: 31 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:pad:wpaper:0116
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