Welfare Implications of Calvo Vs. Rotemberg Pricing Assumptions

By G. Lombardo, David Vestin. Social Science Research Network, 2008

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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

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/6318e6a9622a67eb90dfdc92c81353bb01b7d68c