Firm-Specific Capital, Nominal Rigidities and the Business Cycle
50 Pages Posted: 3 Feb 2005 Last revised: 27 Aug 2010
Date Written: January 2005
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.
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