Discretionary Monetary Policy in the Calvo Model

41 Pages Posted: 18 Dec 2012

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: May 1, 2011

Abstract

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 8 percent for a baseline calibration, but it varies substantially with alternative structural parameter values. 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.

Keywords: time-consistent optimal monetary policy, relative price distortion, sticky prices, discretion

JEL Classification: E31, E52

Suggested Citation

Van Zandweghe, Willem and Wolman, Alexander L., Discretionary Monetary Policy in the Calvo Model (May 1, 2011). FRB Richmond Working Paper No. 11-03. Available at SSRN: https://ssrn.com/abstract=2190616 or http://dx.doi.org/10.2139/ssrn.2190616

Willem Van Zandweghe

Federal Reserve Bank of Cleveland ( email )

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

Alexander L. Wolman (Contact Author)

Federal Reserve Bank of Richmond ( email )

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

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