Discretionary monetary policy in the Calvo model

Willem Van Zandweghe and Alexander Wolman

No 11-03, Working Paper from Federal Reserve Bank of Richmond

Abstract: We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria.

Keywords: Inflation (Finance); Monetary policy; Prices (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Journal Article: Discretionary monetary policy in the Calvo model (2019)
Working Paper: Discretionary monetary policy in the Calvo model (2010)
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