.ISSN (e) 1759-7331
(print) 1759-7323
Quantitative Economics
An open-access journal in quantitative economics
Journal of the
Econometric Society
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Quantitative Economics, Volume 10, Issue 1 (January 2019)

Discretionary monetary policy in the Calvo model

Willem Van Zandweghe, Alexander L. Wolman


We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply, producing three main contributions. First, price‐adjusting firms have a unique equilibrium price for a broad range of parameterizations, in contrast to earlier results for the Taylor pricing model. Second, a generalized Euler equation makes transparent how the monetary authority affects future welfare through its influence on the future state of the economy. Third, we provide global solutions, including welfare analysis, for the transitional dynamics that occur if the monetary authority gains or loses the ability to commit.
Time‐consistent optimal monetary policy discretion Markov‐perfect equilibrium sticky prices relative price distortion E31 E52

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