Testing the Calvo Model of Sticky Prices

This paper discusses the empirical performance of a widely used model of nominal rigidities: the Calvo model of sticky goods prices. We argue that there is overwhelming evidence against this model. But this evidence is generated under three key maintained assumptions. First, there is no lag between the time firms reoptimize their price plans and the time they implement those plans. Second, there is no measurement error in inflation. Finally, monetary policy was the same in the pre-1979 period and the post 1982 period. We discusss the impact of relaxing each of these assumptions