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

Author

Listed:
  • Guido Ascari

    (Università di Pavia)

  • Efrem Castelnuovo

    (Università di Padova)

  • Lorenza Rossi

    (Università di Pavia)

Abstract

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.

Suggested Citation

  • Guido Ascari & Efrem Castelnuovo & Lorenza Rossi, 2010. "Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation," "Marco Fanno" Working Papers 0116, Dipartimento di Scienze Economiche "Marco Fanno".
    • Handle: RePEc:pad:wpaper:0116
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    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods

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