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Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts

By Engin Kara and Huw Dixon

Abstract

n this paper we develop the Generalize Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. We are able to show that even in economies with the same average contract length, monetary shocks will be more persistent when there are longer contracts. In particular we are able to solve the puzzle of why Calvo contracts appear to be more persistent than simple Taylor contracts: it is because the standard calibration of Calvo contracts is not correctPersistence, Taylor contract, Calvo

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