ARROW–CALVO PRICE STAGGERING

Peter McAdam () and Alpo Willman

Manchester School, 2010, vol. 78, issue 6, 556-581

Abstract: We merge Arrow and Calvo pricing themes leading to a price‐resetting signal dependent on inflation and competitiveness. This allows us to tractably analyse state‐dependent issues and to develop a New Keynesian Phillips curve (NKPC) expressed for the levels of variables and a specification which is not regime dependent. The standard NKPC arises as a special case. Using non‐linear simulation and estimation techniques, we then demonstrate the importance of regime dependence in inflation dynamics and show that standard NKPCs are mis‐specified even in low‐inflation regimes. We further detect strong intrinsic persistence in historical US inflation.

Date: 2010
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https://doi.org/10.1111/j.1467-9957.2009.02156.x

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