Morning Must-Read: Nick Rowe: Microfoundations we like vs microfoundations we can solve

Nick Rowe: Worthwhile Canadian Initiative: Microfoundations we like vs microfoundations we can solve:

Take just one example… Calvo pricing…. The Calvo fairy visits each firm at random, taps it with her wand, and lets it change its price. The probability of her visiting in any period is 1/n…. Make one very small change…. Assume she visits… each firm once every n periods…. That’s a different model… a nightmare to solve. Both those models are equally microfounded. Or equally not microfounded, because the fairy herself is, well, just a fairy, and not a real person. She’s an ad hoc fairy, who is just a metaphor for our ignorance about why the price of money (the reciprocal of the price level) doesn’t behave like the prices of other financial assets…. The non-random fairy generates inflation-inertia and the random fairy doesn’t. You get a sticky inflation rate, and not just a sticky price level, with the non-random fairy. Trouble is, I can solve the first model, but I can’t solve the second model…. I have three options: 1. I can assume microfoundations I don’t like…. 2. I can assume microfoundations I like… and wave my hands…. 3. I can write down an equation for an ad hoc Phillips Curve with inflation inertia, wave my hands…