Calvo Contracts - Optimal Indexation in General Equilibrium

A. Patrick Minford and Vo Phuong Mai Le

No 5616, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Calvo contracts, which are the basis of the current generation of New Keynesian models, widely include indexation to general inflation. We argue that the indexing formula should be expected inflation rather than lagged inflation. This optimises the welfare of the representative agent in a general equilibrium model of the New Keynesian type. This is shown analytically for a simplified model and by numerical simulation for a full model with price and wage contracts as well as capital. The consequence of such indexation is that monetary policy no longer has any effect on welfare.

Keywords: New keynesian; Calvo contracts; Indexing (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (1)

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Working Paper: Calvo Contracts - Optimal Indexation in General Equilibrium (2008)
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