Quantitative Economics

Journal Of The Econometric Society

Edited by: Stéphane Bonhomme • Print ISSN: 1759-7323 • Online ISSN: 1759-7331

Quantitative Economics: Jan, 2019, Volume 10, Issue 1

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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