Firm-Specific Capital, Nominal Rigidities and the Business Cycle
Federal Reserve Banks - Federal Reserve Bank of Atlanta; Federal Reserve Bank of Cleveland; University of Chicago - Booth School of Business
Lawrence J. Christiano
Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)
Sveriges Riksbank - Research Division
March 5, 2010
FRB International Finance Discussion Paper No. 990
This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on average once every 1.8 quarters. The key feature of our model underlying this result is that capital is firm-specific. If we adopt the standard assumption that capital is homogeneous and traded in economy-wide rental markets, we find that firms reoptimize their prices on average once every 9 quarters. We argue that the micro implications of the model strongly favor the firm-specific capital specification.
Number of Pages in PDF File: 52
JEL Classification: E3, E4, E5
Date posted: March 11, 2010
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