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Welfare implications of Calvo vs. Rotemberg pricing assumptions

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  • Vestin, David
  • Lombardo, Giovanni

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. JEL Classification: E3, E5

Suggested Citation

  • Vestin, David & Lombardo, Giovanni, 2007. "Welfare implications of Calvo vs. Rotemberg pricing assumptions," Working Paper Series 770, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2007770
    Note: 343743
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    More about this item

    Keywords

    Calvo price adjustment; inflation; Rotemberg price adjustment; second-order approximation; welfare;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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