Calvo Contracts: A Critique

17 Pages Posted: 7 Apr 2004

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

David A. Peel

Lancaster University - Management School

Date Written: March 2004

Abstract

The Calvo contract Phillips Curve is widely indexed for general inflation, using either core inflation or other backward-looking formulae. Such a Phillips Curve implies a high and persistent degree of nominal rigidity. It is argued here that optimal indexation would by contrast use the rational expectation of inflation. If this scheme is implemented, the relationship defaults to a familiar 'surprise' Phillips Curve, removing all except temporary monetary rigidity.

Keywords: Price stickiness, indexing, rational expectations, Phillips curve, new-Keynesian synthesis

JEL Classification: E31, E32

Suggested Citation

Minford, Patrick and Peel, David Alan, Calvo Contracts: A Critique (March 2004). CEPR Discussion Paper No. 4288. Available at SSRN: https://ssrn.com/abstract=527602

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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Centre for Economic Policy Research (CEPR)

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David Alan Peel

Lancaster University - Management School ( email )

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Lancaster, LA1 4YX
United Kingdom
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+44 (0)1524 594244 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/peeld/

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