The Dynamic Properties of Alternative Assumptions on Price Adjustment in New Keynesian Models

This paper presents a classification of the different new Phillips curves existing in the literature as a set of choices based on three assumptions: the choice of the structure of price adjustments (Calvo or Taylor), the presence of backward indexation, and the type of price contracts (fixed prices or predetermined prices). The paper suggests study of the dynamic properties of each specification, following different monetary shocks on the growth rate of the money stock. We develop the analytical form of the price dynamics, and we display graphics for the responses of prices, output, and inflation. We show that the choice made for each of the three assumptions has a strong influence on the dynamic properties. Notably, the choice of the price structure, while often considered as unimportant, is indeed the most influential choice concerning the dynamic responses of output and inflation.