Calvo Contracts: A Critique

A. Patrick L. Minford and David A. Peel

No 4288, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Calvo contract Phillips Curve is widely indexed for general inflation, using either core inflation or other backward-looking formulae. Such a Phillips Curve implies a high and persistent degree of nominal rigidity. It is argued here that optimal indexation would by contrast use the rational expectation of inflation. If this scheme is implemented, the relationship defaults to a familiar ‘surprise’ Phillips Curve, removing all except temporary monetary rigidity.

Keywords: indexing; new-keynesian synthesis; phillips curve; price stickiness; rational expectations (search for similar items in EconPapers)
JEL-codes: E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hpe
Date: 2004-03
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