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
Sveriges Riksbank - Research Division
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)
Northwestern University; National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 4858
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 that resolves this apparent micro/macro conflict. Our model is consistent with post-war US 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: 52
JEL Classification: E30, E40, E50
Date posted: May 11, 2005
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