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DOES CALVO MEET ROTEMBERG AT THE ZERO LOWER BOUND?

Published online by Cambridge University Press:  11 June 2019

Jianjun Miao  and
Phuong V. Ngo
Jianjun Miao
Affiliation:
Boston University Peking University Central University of Finance and Economics
Phuong V. Ngo*
Affiliation:
Cleveland State University
*
Address correspondence to: Phuong V. Ngo, Department of Economics, Cleveland State University, 2121 Euclid, Avenue, Cleveland, OH 44115, USA. e-mail: [email protected]. Phone: (617) 347 2706. Fax: (216) 687 9206.
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Abstract

This paper compares the conventional Calvo and Rotemberg price adjustments at the zero lower bound (ZLB) on nominal interest rates. Although the two pricing mechanisms are equivalent to a first-order approximation around the zero-inflation steady state, they produce very different results, based on a fully-nonlinear method. Specifically, the nominal interest rate hits the ZLB more frequently in the Calvo model than in the Rotemberg model. At the ZLB, deflation is larger and recessions are more severe in the Calvo model. The main reason for the difference in results is that price adjustment costs show up in the resource constraints in the Rotemberg. When they are rebated to the household, the two models behave similarly.

Keywords

Calvo Price AdjustmentsRotemberg Price AdjustmentsZLBProjection Methods
Type
Notes
Information
Macroeconomic Dynamics , Volume 25 , Issue 4 , June 2021 , pp. 1090 - 1111
Copyright
© Cambridge University Press 2019

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Footnotes

This paper is a revision of an essential part of our previously circulated working paper entitled “Does Calvo Meet Rotemberg at the Zero Lower Bound?” We would like to thank William Barnett, John Leahy, Karl Schmedders, Matthias Doepke, an associate editor, and anonymous reviewers for their helpful comments/suggestions. We also thank Gauti Eggertsson, Lena Korber, Taisuke Nakata, Nate Throckmorton, and participants from the 2015 Econometric Society World Congress, the 2015 Meeting of the Society for Economic Dynamics, and the fall 2014 Midwest Macroeconomics Meeting for their helpful conversations/comments. In addition, Phuong Ngo gratefully acknowledges the Graduate Faculty Travel Award from the Office of Research at Cleveland State University.

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