Partial Adjustment and Staggered Price Setting

Posted: 6 Nov 2001

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Abstract

This paper compares Taylor-style staggered price setting to partial adjustment of prices (or Calvo staggering) in a small optimizing IS/LM model. In contrast to the overwhelming perception in the literature, the models are not similar for most parameterizations. In particular, the dynamic response of the economy to shocks is quite different in the two models, and the welfare cost of price rigidity is eight or more times larger in the Calvo model than in the Taylor model (for typical calibrations). Suggestions for calibrations under which the models are more similar are also presented.

Keywords: staggered price setting, Calvo price setting

JEL Classification: E32, E10, E31

Suggested Citation

Kiley, Michael T., Partial Adjustment and Staggered Price Setting. Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=287639

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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