The name is absent

continuous time. Hence the completed contract length is a little less than
twice the age¹³.

5.0.4 Pricing in the Calvo- GTE.

We have defined the Calvo- GTE in terms of the structure of completed con-
tract lengths. The only difference between the Calvo economy and the
Calvo-GTE is in the pricing decision. In the Calvo economy, the firm is un-
certain of the contract length: the pricing decision must be made "ex ante",
that is before the firm knows which length nature has choosen. This yields
the standard Calvo pricing decision. Once the price is set, the firm finds
out its contract length in due course¹⁴. By contrast, in the Calvo-GTE, the
firm-unions know which sector they belong to when they set the wage. This
has two implications. First, whereas in the Calvo process, all firm-unions
will set the same price (since they have the same subjective probability dis-
tribution over durations), in the Taylor equivalent the firms-unions set a
price conditional on the contract length. Hence, wages in each sector of the
Calvo-GTE will be different. Taking the simple case of β = 1, from (18) the
reset wage in sector i with a T_i contract is then the average "optimal" price
over the T_i periods is

₁ ^Tl
xit = T Σ ^{(Pt+S + lyt+s)}

Proposition 1 Let β = 1. The mean reset wage at time t in the Calvo-GTE
is
∞

^χt = ∑^ω2 (i^{_ ω})^s~¹ (pt+s+ffyt+s)
s=0

Clearly, the mean reset wage in the Calvo-GTE is equal to the standard
Calvo reset wage. In the Calvo-GTE, there is a distribution of sector specific
reset wages x_it in each period. Hence, in addition to the distribution of
prices across cohorts (defined by when they last reset prices) in the Calvo
model, the GTE has a distribution across sectors within the cohort, but with
same mean.

¹³See Luckett (1979).

¹⁴It does not matter when: either straight after the pricing decision or at the last moment
when it gets the Calvo phone call that it is time to reset the wage.

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