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Economic Perspectives, Vol. 27, 2nd, No. 2, May 2003
Testing the Calvo model of sticky prices
This article discusses the empirical performance of a widely used model of nominal rigidities: the Calvo model of sticky goods prices. The authors argue that there is overwhelming evidence against this model. But this evidence is generated under three key assumptions: one, there is no lag between the time firms reoptimize their price plans and the time they implement those plans; two, there is no measurement error in inflation; and three, monetary policy is the same in the pre-1979 and post-1982 periods. The authors discuss the impact of relaxing each of these assumptions.
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