Undesired Consequences of Calvo Pricing in a Non-linear World

Applications in modern macroeconomics increasingly require non-linear solution methods. Our paper studies the consequences of the widely used Calvo pricing mechanism in a non-linear world. We introduce the concept of the stability region as a non-linear counterpart to the determinacy region. We show that in non-linear models the Taylor principle is no longer sufficient for inflation stability and stable macroeconomic model moments. The presence of a self-reinforcing price-inflation spiral captured by the non-linear solution presents a new challenge for monetary policy in anchoring inflation expectations