Second-Order Approximation to the Rotemberg Model around a Distorted Steady State

Tatiana Damjanovic () and Charles Nolan

No 2010-31, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Less is known about social welfare objectives when it is costly to change prices, as in Rotemberg (1982), compared with Calvo-type models. We derive a quadratic approximate welfare function around a distorted steady state for the costly price adjustment model. We highlight the similarities and differences to the Calvo setup. Both models imply inflation and output stabilization goals. It is explained why the degree of distortion in the economy influences inflation aversion in the Rotemberg framework in a way that differs from the Calvo setup.

Keywords: Price Stickiness; Rotemberg Model; Costly Price Adjustment (search for similar items in EconPapers)
Date: 2010
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Journal Article: Second-order approximation to the Rotemberg model around a distorted steady state (2011)
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