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Firm-specific capital, nominal rigidities, and the business cycle

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Author Info
David E. Altig
Lawrence J. Christiano
Martin Eichenbaum
Jesper Linde

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Abstract

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on inflation inertia even though firms re-optimize prices on average once every 1.5 quarters. The key feature of our model is that capital is firm-specific and predetermined within a period.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0416.

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Date of creation: 2004
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Handle: RePEc:fip:fedcwp:0416

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Keywords: Inflation (Finance) Monetary policy Business cycles

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