Working Paper Series no. 324: Generalized Taylor and Generalized Calvo price and wage-setting: micro evidence with macro implications

Abstract

The Generalized Calvo and the Generalized Taylor model of price and wage-setting are, unlike the standard Calvo and Taylor counterparts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the hump-shaped response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.

Huw Dixon and Hervé Le Bihan
March 2011

Classification JEL : E31, E32, E52, J30

Keywords : Contract length, steady state, hazard rate, Calvo, Taylor, wage-setting, price-setting.