Welfare Implications of Calvo Vs. Rotemberg Pricing Assumptions
20 Pages Posted: 28 Jun 2007
Date Written: June 2007
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: Suggested Citation