DP4288 Calvo Contracts: A Critique

Author(s): Patrick Minford , David Peel

Publication Date: March 2004

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

JEL(s): E31 , E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4288.asp

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.