Discretionary Monetary Policy in the Calvo Model

41 Pages Posted: 17 Feb 2010 Last revised: 29 Mar 2017

See all articles by Willem Van Zandweghe

Willem Van Zandweghe

Federal Reserve Bank of Cleveland

Alexander L. Wolman

Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: February 16, 2017

Abstract

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

Van Zandweghe, Willem and Wolman, Alexander L., Discretionary Monetary Policy in the Calvo Model (February 16, 2017). Available at SSRN: https://ssrn.com/abstract=1553986 or http://dx.doi.org/10.2139/ssrn.1553986

Willem Van Zandweghe (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Alexander L. Wolman

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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