Persistence and Nominal Inertia in a
Generalised Taylor Economy: How Longer
Contracts Dominate Shorter Contracts*
Huw Dixon⅛nd Engin Kara+
January 18, 2005
Abstract
In this paper we develop the Generalise Taylor Economy (GTE)
in which there are many sectors with overlapping contracts of differ-
ent lengths. We are able to show that even in economies with the
same average contract length, monetary shocks will be more persis-
tent when there are longer contracts. In particular we are able to
solve the puzzle of why Calvo contracts appear to be more persistent
than simple Taylor contracts: it is because the standard calibration of
Calvo contracts is not correct.
.
JEL: E50, E24, E32, E52
Keywords: Persistence, Taylor contract, Calvo.
*This work was started when Huw Dixon was a visiting Researh Fellow at the European
Central Bank. We would like to thank Vitor Gaspar, Michel Juillard, Neil Rankin, Luigi
Siciliani, Peter N Smith, Zheng Liu and particapants at the St Andrews Macroconference
in September 2004 and seminars at City University and Leicester for their comments.
Faults remain our own.
f Corresponding author: Economics Department, University of York, York, YO10 5DD.
[email protected].