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Does Calvo Meet Rotemberg at the Zero Lower Bound?

Author

Listed:
  • Phuong Ngo

    (Cleveland State University)

  • Jianjun Miao

    (Boston University)

Abstract

This paper compares the Calvo model with the Rotemberg model in a fully nonlinear dynamic new Keynesian framework with an occasionally binding zero lower bound (ZLB) on nominal interest rates. Although the two models are equivalent to a first-order approximation, they generate very different results regarding the policy functions and the government spending multiplier based on nonlinear solutions. The multiplier in the Calvo model is less than one for low persistence of the government spending shock and rises above one as the persistence increases, but eventually decreases with the persistence and falls below one for sufficiently high persistence. In addition, the multiplier increases with the duration of the ZLB. By contrast, the multiplier in the Rotemberg model is less than one and decreases with the persistence. Surprisingly, it also decreases with the duration of the ZLB.

Suggested Citation

  • Phuong Ngo & Jianjun Miao, 2015. "Does Calvo Meet Rotemberg at the Zero Lower Bound?," 2015 Meeting Papers 602, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:602
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    References listed on IDEAS

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    Cited by:

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    2. Gauti Eggertsson & Sergey Egiev & Alessandro Lin & Josef Platzer & Luca Riva, 2021. "A Toolkit for Solving Models with a Lower Bound on Interest Rates of Stochastic Duration," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 121-173, July.
    3. Horvath, Roman & Kaszab, Lorant & Marsal, Ales & Rabitsch, Katrin, 2020. "Determinants of fiscal multipliers revisited," Journal of Macroeconomics, Elsevier, vol. 63(C).
    4. Taisuke Nakata, 2017. "Uncertainty at the Zero Lower Bound," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 186-221, July.
    5. Cho, Deaha & Han, Yoonshin & Oh, Joonseok & Rogantini Picco, Anna, 2020. "Optimal Monetary Policy and Uncertainty Shocks," Dynare Working Papers 61, CEPREMAP.
    6. Eggertsson, Gauti B. & Singh, Sanjay R., 2019. "Log-linear approximation versus an exact solution at the ZLB in the New Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 21-43.
    7. Sims, Eric & Wolff, Jonathan, 2017. "State-dependent fiscal multipliers: Calvo vs. Rotemberg," Economics Letters, Elsevier, vol. 159(C), pages 190-194.
    8. Lee E. Ohanian, 2016. "The Great Recession in the Shadow of the Great Depression: A Review Essay on “Hall of Mirrors: The Great Depression, The Great Recession and the Uses and Misuses Of History”," NBER Working Papers 22239, National Bureau of Economic Research, Inc.
    9. Volker Hahn, 2017. "Policy Effects in a Simple Fully Non-Linear New Keynesian Model of the Liquidity Trap," Working Paper Series of the Department of Economics, University of Konstanz 2017-05, Department of Economics, University of Konstanz.
    10. OH, Joonseok, 2019. "The propagation of uncertainty shocks : Rotemberg vs. Calvo," Economics Working Papers ECO 2019/01, European University Institute.

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