Discretionary monetary policy in the Calvo model

Willem Van Zandweghe and Alexander Wolman

No RWP 10-06, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above eight percent for a baseline calibration, and it varies non-monotonically with the degree of price stickiness. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria.

Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mic and nep-mon
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Related works:
Journal Article: Discretionary monetary policy in the Calvo model (2019)
Working Paper: Discretionary monetary policy in the Calvo model (2011)
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