Long-run Phillips Curve and Disinfation Dynamics: Calvo vs. Rotemberg Price Setting

Lorenza Rossi and Guido Ascari

No ief0082, DISCE - Quaderni dell'Istituto di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: There is widespread agreement that the two most widely used pricing assumptions in the New-Keynesian literature, i.e., Calvo and Rotemberg price-setting mechanisms, deliver equivalent dynamics. We show that, instead, they entail a very di¤erent dynamics of adjustment after a disin?ation, once non linear simulations are employed. In the Calvo model disin?ation implies output gains, while in the Rotemberg model a disin?ation experiment implies output losses. We show that this is due to the di¤erent wedges created by the nominal rigidities in the two models: between output and hours in the Calvo model, while between output and consumption in the Rotemberg model. More- over, unlike the Calvo model, in the Rotemberg model real wage rigidi- ties cause a signi?cant output slump along the adjustment path, thus restoring a dynamics in line both with the conventional wisdom and the empirical evidence.

Keywords: Disinfation; Sticky Prices; Nonlinearities (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Pages: nn pages 28
Date: 2008-06
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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