Calvo contract

Updated: Aug 20, 2021

An explanation of nominal rigidity in New Keynesian economics, introduced by Guillermo Calvo, based on staggered price setting by firms. The Calvo contract model assumes that firms set nominal prices and, at any given time, each firm can adjust its price with an exogenous probability, independently of the time since the previous adjustment. The nominal rigidity prevents prices adjusting instantaneously to clear markets. See also Taylor contract.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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