DP4288 | Calvo Contracts: A Critique

Publication Date

23/03/2004

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Abstract

The Calvo contract Phillips Curve is widely indexed for general inflation, using either core inflation or other backward-looking formulae. Such a Phillips Curve implies a high and persistent degree of nominal rigidity. It is argued here that optimal indexation would by contrast use the rational expectation of inflation. If this scheme is implemented, the relationship defaults to a familiar ?surprise? Phillips Curve, removing all except temporary monetary rigidity.