Firm-Specific Capital, Nominal Rigidities and the Business Cycle
Sveriges Riksbank Working Paper Series No. 176
54 Pages Posted: 14 Feb 2005 Last revised: 9 Mar 2009
Date Written: October 18, 2006
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.
Keywords: capital, inflation, price behavior
JEL Classification: E3, E4, E5
Suggested Citation: Suggested Citation