New Keynesian Phillips Curve with Calvo pricing mechanism Cover Image

Nowokeynesistowska krzywa Phillipsa ze schematem cenotwórczym Calvo
New Keynesian Phillips Curve with Calvo pricing mechanism

Author(s): Paweł Baranowski, Maciej Malaczewski, Mariusz Górajski
Subject(s): Economy
Published by: Wydawnictwo Uniwersytetu Ekonomicznego we Wrocławiu
Keywords: inflation; New Keynesian Phillips Curve; Calvo pricing mechanism

Summary/Abstract: The paper discusses the New Keynesian model with a pricing mechanism proposed by Calvo and presents some details of derivation of aggregate inflation equation − New Keynesian Phillips Curve. The model assumes representative monopolistic competition firms with a stochastic nominal rigidity mechanism. In accordance with the Calvo mechanism prices’ changes occur randomly but with a fixed exogenous probability. Under this mechanism the firms set prices of their products that maximize discounted profits in infinite horizon under rational expectations, with regard of the possibility of nominal rigidity in future. Within this framework we can derive the New Keynesian Phillips Curve implies that in the short term inflation is determined by three variables. The results show that inflation is an increasing function of: (i) future inflation expectations, (ii) current output gap and (iii) specific measure of price dispersion (weighted geometric average of the prices). The last component was not included in the literature, hence it is a novel feature of the derivation presented in the paper.

  • Issue Year: 2013
  • Issue No: 22
  • Page Range: 127-143
  • Page Count: 17
  • Language: Polish