Generalized Calvo Approach

Abstract

This paper presents a generalized application of the Calvo pricing approach, assuming that in each particular market, both prices and quantities are adjusted according to the Calvo approach. With certain restrictions placed on the parameters, the system of log-linearized equations that I derived using the generalized Calvo approach produces similar dynamics within the economy as are produced by the system that one would obtain assuming Calvo pricing, consumption habit formation, capital adjustment costs, investment adjustment costs, search-and-match at the labor market, and smooth money adjustment. Therefore, the generalized Calvo approach proposed here acts as a unification of many frictions used in conventional dynamic stochastic general equilibrium models.