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Calvo Contracts - Optimal Indexation in General Equilibrium

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  • Minford, Patrick
  • Le, Vo Phuong Mai

Abstract

Calvo contracts, which are the basis of the current generation of New Keynesian models, widely include indexation to general inflation. We argue that the indexing formula should be expected inflation rather than lagged inflation. This optimises the welfare of the representative agent in a general equilibrium model of the New Keynesian type. This is shown analytically for a simplified model and by numerical simulation for a full model with price and wage contracts as well as capital. The consequence of such indexation is that monetary policy no longer has any effect on welfare.

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  • Minford, Patrick & Le, Vo Phuong Mai, 2006. "Calvo Contracts - Optimal Indexation in General Equilibrium," CEPR Discussion Papers 5616, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5616
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    Cited by:

    1. Minford, Patrick & Le, Vo Phuong Mai, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    New keynesian; Calvo contracts; Indexing;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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