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.
