Firm-Specific Capital, Nominal Rigidities and the Business Cycle
52 Pages Posted: 11 May 2005
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 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.
JEL Classification: E30, E40, E50
Suggested Citation: Suggested Citation