lengths. We use this approach to focus on the effect of the presence longer
term contracts on the persistence of impulse-response functions generated by
a monetary shock. Our conclusions are the following:
• A small proportion of long-term contracts can generate a significant
increase in persistence.
• The average length of contracts in the Calvo model has been seriously
underestimated, because the age and life-time of contracts have been
confused. If modelers want an average contract length of 4-quarters,
they should choose a reset probability of ω = 0.4. The often used value
of 0.25 generates an average contract length of 7 quarters.
• When we compare the standard Calvo model with the corresponding
CaXvo-GTE, we find that although the wage-setting behavior differs,
the persistence of the two is very similar.
• In general, if we want to model an economy with many different con-
tract lengths using a simple Taylor economy, we should choose a con-
tract length which is greater than the average. This is becuase the
presence of contracts with longer duration leads to more persistence
despite having a similar mean.
23
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