Ascension (Calvo)

Ascension, as defined within the context of the Calvo system (developed by Guillermo Calvo, an economist), refers to a framework used in macroeconomic modeling, specifically to address issues related to price stickiness and gradual adjustment of economic variables. The "Calvo pricing" or "Calvo staggered pricing" model posits that not all firms can adjust their prices in every period. Instead, a fraction of firms, often denoted by (1 - θ), is randomly selected to re-optimize their price in each period. The parameter θ (theta) represents the probability that a firm cannot adjust its price in a given period. This probability is typically assumed to be constant and independent across firms.

The core idea of the Calvo model is to introduce a degree of inertia or stickiness into the pricing process. This contrasts with models where prices are perfectly flexible and adjust instantaneously to changes in economic conditions. By assuming that only a subset of firms can adjust their prices, the Calvo model generates a distributed lag structure in the aggregate price level, meaning that the price level responds gradually to shocks.

This framework has become a standard building block in New Keynesian macroeconomic models, particularly Dynamic Stochastic General Equilibrium (DSGE) models. These models are used to analyze the effects of monetary and fiscal policies on the economy. The Calvo pricing assumption allows these models to capture the short-run non-neutrality of monetary policy, meaning that changes in the money supply can have real effects on output and employment in the short run, even though in the long run, monetary policy is assumed to be neutral.

The Calvo model is often compared to the Taylor staggered pricing model, another approach to modeling price stickiness. While both models lead to gradual price adjustment, they differ in their assumptions about how firms are able to adjust prices. In the Taylor model, firms are assumed to set prices for a fixed duration (e.g., two or four quarters), with the timings of price setting staggered across firms. In the Calvo model, the probability of price adjustment is constant over time, regardless of how long a firm's price has been fixed.

The Calvo pricing mechanism provides a mathematically tractable way to introduce price stickiness into macroeconomic models, making it a valuable tool for economists studying monetary policy and business cycles. It allows for the analysis of how nominal rigidities affect the economy's response to various shocks and policy interventions. While a simplification of real-world pricing behavior, it offers a useful approximation and helps to generate more realistic macroeconomic dynamics.