How to Compare Taylor and Calvo Contracts: A Comment on Michael Kiley
In a recent paper, Michael Kiley argued that the Calvo model of price adjustment is both quantitatively and qualitatively different from the Taylor model. What we show is that Kiley (along with most other people) are choosing the wrong parameterization to compare the two models. In effect they are comparing the average age of Calvo contracts with the completed length of Taylor contracts. When we compare the average age of Taylor contracts with the average of Calvo, the differences become much smaller and easier to understand. We also show that autocorrelation of output can be larger in a Taylor economy than in the age-equivalent Calvo economy.
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