Discussion Paper Details

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Title: Calvo Contracts: A Critique

Author(s): Patrick Minford and David Peel

Publication Date: March 2004

Keyword(s): indexing, new-keynesian synthesis, phillips curve, price stickiness and rational expectations

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Minford, P and Peel, D. 2004. 'Calvo Contracts: A Critique'. London, Centre for Economic Policy Research.