Calvo contracts: optimal indexation in general equilibrium

Le, Vo Phuong Mai and Minford, Patrick 2008. Calvo contracts: optimal indexation in general equilibrium. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

Calvo contracts, which are the basis of the current generation of New Keynesian models, widely include indexation to general inflation. We argue that the indexing formula should be expected inflation rather than lagged inflations. This is likely to optimise the welfare of the representative agent in a general equilibrium model of the New Keynesian type. The economy behaves under rational indexation is similar to a New Classical model, with shocks producing an immediate �fluctuation in both prices and output followed by a fairly rapid return to steady state. The monetary policy that targets price level brings a greater economic stability.

Item Type:	Monograph (Working Paper)
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Publisher:	Cardiff University
Date of First Compliant Deposit:	30 March 2016
Last Modified:	06 Oct 2015 08:44
URI:	https://orca.cardiff.ac.uk/id/eprint/77757

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