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

Author

Listed:
  • Guido Ascari

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

  • Efrem Castelnuovo

    (University of Padua and Bank of Finland)

  • Lorenza Rossi

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

Abstract

This paper estimates and compares new-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes - Calvo, Rotemberg - and a positive trend inflation rate. Our empirical findings (i) support trend inflation-equipped models as better fitting during the U.S. great moderation period, (ii) provide evidence in favor of the statistical superiority of the Calvo setting, and (iii) suggest the absence of price indexation under the Calvo mechanism only. Possibly, the superiority of the Calvo model (against Rotemberg) is due to the restrictions implied by such pricing scheme for the aggregate demand equation. The determinacy regions associated to the two estimated models indicate relevant differences in the implementable simple policies. Our findings call for the development of monetary policy models consistently embedding a positive trend inflation rate and possibly based on a Calvo pricing scheme.

Suggested Citation

  • Guido Ascari & Efrem Castelnuovo & Lorenza Rossi, 2010. "Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation," Quaderni di Dipartimento 108, University of Pavia, Department of Economics and Quantitative Methods.
    • Handle: RePEc:pav:wpaper:108
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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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