Discretionary Monetary Policy in the Calvo Model
Willem Van Zandweghe
Federal Reserve Bank of Kansas City
Alexander L. Wolman
Federal Reserve Bank of Richmond
February 16, 2010
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 eight percent for a baseline calibration, and it varies non-monotonically with the degree of price stickiness. 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.
Number of Pages in PDF File: 31
Keywords: time-consisten monetary policy, relative price distortion, sticky prices, discretion
JEL Classification: E31, E52working papers series
Date posted: February 17, 2010
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