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Calvo vs. Rotemberg in a trend inflation world: An empirical investigation

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<mark>Journal publication date</mark>30/11/2011
<mark>Journal</mark>Journal of Economic Dynamics and Control
Issue number11
Number of pages16
Pages (from-to)1852-1867
Publication StatusPublished
Early online date12/06/11
<mark>Original language</mark>English


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.