This paper estimates and compares New-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes-Calvo (1983) and Rotemberg (1982)-under a positive trend inflation rate. Our empirical findings (i) support trend inflation as an empirically relevant feature of the U.S. great moderation; (ii) provide evidence in favor of the statistical superiority of the Calvo setting; (iii) point to a substantially lower degree of price indexation under Calvo. We show that the superiority of the Calvo model is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation.
Calvo vs. Rotemberg in a Trend Inflation World: An Empirical Investigation
CASTELNUOVO, EFREM;
2011
Abstract
This paper estimates and compares New-Keynesian DSGE monetary models of the business cycle derived under two different pricing schemes-Calvo (1983) and Rotemberg (1982)-under a positive trend inflation rate. Our empirical findings (i) support trend inflation as an empirically relevant feature of the U.S. great moderation; (ii) provide evidence in favor of the statistical superiority of the Calvo setting; (iii) point to a substantially lower degree of price indexation under Calvo. We show that the superiority of the Calvo model is due to the restrictions imposed by such a pricing scheme on the aggregate demand equation.
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