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Undesired Consequences of Calvo Pricing in a Non-linear World

Author

Listed:
  • Ales Marsal

    (National Bank of Slovakia)

  • Katrin Rabitsch
  • Lorant Kaszab

Abstract

Applications in modern macroeconomics increasingly require non-linear solution methods. Our paper studies the consequences of the widely used Calvo pricing mechanism in a non-linear world. We introduce the concept of the stability region as a non-linear counterpart to the determinacy region. We show that in non-linear models the Taylor principle is no longer sufficient for inflation stability and stable macroeconomic model moments. The presence of a self-reinforcing price-inflation spiral captured by the non-linear solution presents a new challenge for monetary policy in anchoring inflation expectations.

Suggested Citation

  • Ales Marsal & Katrin Rabitsch & Lorant Kaszab, 2023. "Undesired Consequences of Calvo Pricing in a Non-linear World," Working and Discussion Papers WP 1/2023, Research Department, National Bank of Slovakia.
    • Handle: RePEc:svk:wpaper:1091
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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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