Undesired Consequences of Calvo Pricing in a Non-linear World

Aleš Maršál, Katrin Rabitsch and Lorant Kaszab

No WP 1/2023, Working and Discussion Papers from Research Department, National Bank of Slovakia

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.

JEL-codes: E13 E31 E43 E44 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2023-01
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1091

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