Publication

This paper examines a P-bar model of price adjustment as compared to the Calvo model, which has been dominant in monetary policy analysis. The author compares the two models and argues that the P-bar model has three advantages over the Calvo model. First, it satisfies the strict version of the natural rate hypothesis. Second, it relies on costs of adjusting output, which are more tangible than menu costs of changing prices. Finally, its basic version of the P-bar model produces a more realistic autocorrelation pattern than the basic Calvo specification.