In this paper, the interaction between inflation and monetary policy rules is analysed within the framework of a dynamic general equilibrium model derived from optimizing behaviour and rational expectations.

This paper compares a number of alternative specifications for price setting in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium model. We compare the Calvo model with a standard Taylor contracting model and show that by allowing for sector-specific capital the...