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Firm-Specific Capital, Nominal Rigidities and the Business CycleDavid AltigFederal Reserve Banks - Federal Reserve Bank of Atlanta; Federal Reserve Bank of Cleveland; University of Chicago - Booth School of Business Lawrence J. ChristianoNorthwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER) Jesper LindéSveriges Riksbank - Research Division Martin EichenbaumNorthwestern University; National Bureau of Economic Research (NBER) Jesper LindeFederal Reserve Board January 2005 NBER Working Paper No. w11034 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 pre-determined within a period.
Number of Pages in PDF File: 50 working papers seriesDate posted: February 3, 2005Suggested CitationContact Information
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