Welfare loss and policy trade-offs: Calvo vs. Rotemberg
Welfare loss and policy trade-offs: Calvo vs. Rotemberg
This paper shows that the Calvo and Rotemberg pricing models lead to different outcomes regarding welfare losses and inflation-output dynamics, based on the type of subsidies used to achieve an efficient steady state. When revenue subsidies are applied in the Rotemberg model, the inflation-output dynamics and welfare loss functions are identical to those of the Calvo model. However, with employment subsidies, the two models differ. Aligning the inflation-output dynamics causes differences in the welfare loss function. These findings underscore the importance of model selection in the design of monetary policy, influencing the trade-off between inflation and output gap stabilisation.
New Keynesian Phillips curve, Optimal monetary policy, Welfare loss
Oh, Joonseok
020d4770-4b18-4b76-bf81-d3e58b9f4eed
28 February 2025
Oh, Joonseok
020d4770-4b18-4b76-bf81-d3e58b9f4eed
Abstract
This paper shows that the Calvo and Rotemberg pricing models lead to different outcomes regarding welfare losses and inflation-output dynamics, based on the type of subsidies used to achieve an efficient steady state. When revenue subsidies are applied in the Rotemberg model, the inflation-output dynamics and welfare loss functions are identical to those of the Calvo model. However, with employment subsidies, the two models differ. Aligning the inflation-output dynamics causes differences in the welfare loss function. These findings underscore the importance of model selection in the design of monetary policy, influencing the trade-off between inflation and output gap stabilisation.
Text
Accepted Manuscript
- Accepted Manuscript
Text
1-s2.0-S0165176525000813-main
- Version of Record
More information
Accepted/In Press date: 19 February 2025
e-pub ahead of print date: 27 February 2025
Published date: 28 February 2025
Keywords:
New Keynesian Phillips curve, Optimal monetary policy, Welfare loss
Identifiers
Local EPrints ID: 499502
URI: http://eprints.soton.ac.uk/id/eprint/499502
ISSN: 0165-1765
PURE UUID: f190421b-c0da-42d2-b0fd-85302823daef
Catalogue record
Date deposited: 21 Mar 2025 17:51
Last modified: 22 Aug 2025 02:42
Export record
Altmetrics
Contributors
Author:
Joonseok Oh
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics