Evaluating Calvo-Style Sticky Price Models∗

This paper assesses the empirical performance of Calvo-style sticky goods price models. We argue that Calvo-style models in which firms update non-reoptimized prices to lagged inflation are consistent with the aggregate data in a statistical sense. We then investigate whether these models imply plausible degrees of inertia in price setting behavior by firms. We find that these model do, but only if we depart from two auxiliary assumptions made in standard expositions of the Calvo model. These assumptions are that monopolistically competitive firms face a constant elasticity of demand, and capital is homogeneous and can be instantaneously reallocated after a shock. When we relax these assumptions our model is consistent with the view that firms reoptimize prices, on average, once every two quarters. ∗We thank Lawrence Christiano for helpful conversations. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve System or the Federal Reserve Bank of Chicago. †Northwestern University, NBER, and Federal Reserve Bank of Chicago. ‡Federal Reserve Bank of Chicago