Welfare Implications of Calvo Vs. Rotemberg Pricing Assumptions

20 Pages Posted: 28 Jun 2007

See all articles by Giovanni Lombardo

Giovanni Lombardo

European Central Bank (ECB)

David Vestin

European Central Bank (ECB)

Date Written: June 2007

Abstract

This paper compares the welfare implications of two widely used pricing assumptions in the New-Keynesian literature: Calvo-pricing vs. Rotemberg-pricing. We show that despite the strong similarities between the two assumptions to a first order of approximation, in general they might entail different welfare costs at higher order of approximation. In the special case of non-distorted steady state, the two pricing assumptions imply identical welfare losses to a second order of approximation.

Keywords: Calvo price adjustment, Rotemberg price adjustment, welfare, inflation, second-order approximation

JEL Classification: E3, E5

Suggested Citation

Lombardo, Giovanni and Vestin, David, Welfare Implications of Calvo Vs. Rotemberg Pricing Assumptions (June 2007). ECB Working Paper No. 770, Available at SSRN: https://ssrn.com/abstract=991610 or http://dx.doi.org/10.2139/ssrn.991610

Giovanni Lombardo (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

David Vestin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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