The Calvo scheme represents the standard specification of price resetting in the New Keynesian model. We show that using this rather than a fixed duration (Taylor) scheme matters importantly for the dynamics of the model as it allows it to generate hump-shaped response of output without an "excessive" average duration of price spells. In spite of its great popularity, the standard New Keynesian (NK) model has many important empirical flaws. The most important ones concern output and, especially, inflation dynamics (Mankiw and Reis, 2002). The failure to generate enough inertia has motivated a search for more successful specifications. A popular remedy is to introduce either myopic (Gali and Gertler, 1999) or backward looking agents (Christiano et al., 2005). The assumption of myopia or backward price indexation in combination with real rigidities seems capable of producing inertia in inflation and output.
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