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Trend Inflation and Firms Price-Setting: Rotemberg vs. Calvo

Author

Listed:
  • Guido Ascari

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Lorenza Rossi

    (Department of Economics and Quantitative Methods, University of Pavia)

Abstract

We compare two widely used pricing assumptions in the New-Keynesian literature: the Calvo and Rotemberg price-setting mechanisms. We show that, once trend in?ation is taken into account, the two models are very different. i) The long-run relationship between inflation and output is positive in the Rotemberg model and negative in the Calvo model. ii) The log-linearized NKPCs are very different and the dynamics of the two models differs even to a first order approximation. iii) Positive trend inflation enlarges the determinacy region in the Rotemberg model, while it shrinks the determinacy region in the Calvo model. iv) The responses of output and inflation to a positive technology shock are amplified by trend inflation in Calvo, while they are damped in Rotemberg. v) The two models imply a different non-linear adjustment after a disinflation.

Suggested Citation

  • Guido Ascari & Lorenza Rossi, 2009. "Trend Inflation and Firms Price-Setting: Rotemberg vs. Calvo," Quaderni di Dipartimento 100, University of Pavia, Department of Economics and Quantitative Methods.
  • Handle: RePEc:pav:wpaper:100
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    Citations

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    Cited by:

    1. Ascari, Guido & Castelnuovo, Efrem & Rossi, Lorenza, 2011. "Calvo vs. Rotemberg in a trend inflation world: An empirical investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1852-1867.
    2. Rahul Nath, 2018. "Equity Pricing New Keynesian Models with Nominal Rigidities and Investment," Economics Series Working Papers 850, University of Oxford, Department of Economics.

    More about this item

    Keywords

    Firms Pricing; Trend Inflation; Determinacy; Disinflation.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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