Discretionary Monetary Policy in the Calvo Model
41 Pages Posted: 17 Feb 2010 Last revised: 29 Mar 2017
Date Written: February 16, 2017
We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply, producing three main contributions. First, the model delivers a unique private-sector equilibrium for a broad range of parameterizations, in contrast to earlier results for the Taylor pricing model. Second, a generalized Euler equation shows how the monetary authority affects future welfare through its influence on the future state of the economy. Third, we provide exact solutions, including welfare analysis, for the transitional dynamics that occur if the monetary authority loses or gains the ability to commit.
Keywords: time-consisten monetary policy, Discretion; Markov-perfect equilibrium; Sticky prices, Relative price distortion
JEL Classification: E31, E52
Suggested Citation: Suggested Citation