Calvo Contracts: A Critique
17 Pages Posted: 7 Apr 2004
Date Written: March 2004
Abstract
The Calvo contract Phillips Curve is widely indexed for general inflation, using either core inflation or other backward-looking formulae. Such a Phillips Curve implies a high and persistent degree of nominal rigidity. It is argued here that optimal indexation would by contrast use the rational expectation of inflation. If this scheme is implemented, the relationship defaults to a familiar 'surprise' Phillips Curve, removing all except temporary monetary rigidity.
Keywords: Price stickiness, indexing, rational expectations, Phillips curve, new-Keynesian synthesis
JEL Classification: E31, E32
Suggested Citation: Suggested Citation
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