DP4288 Calvo Contracts: A Critique

Author(s): Patrick Minford, David Peel
Publication Date: March 2004
Keyword(s): indexing, new-keynesian synthesis, phillips curve, price stickiness, rational expectations
JEL(s): E31, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4288

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.