Evaluating the Calvo Model of Sticky Prices
This paper studies the empirical performance of a widely used model of nominal
rigidities: the Calvo model of sticky goods prices. We describe an extended version of
this model with variable elasticity of demand of the differentiated goods and imperfect
capital mobility. We find little evidence against standard versions of the model without
the extensions, but the estimated frequency of price adjustment is implausible. With
the extended model the estimates are more reasonable. This is especially so if the
sample is split to take into account a possible change in monetary regime around 1980.
