Pitfalls in the Modelling of Forward-Looking Price Setting and Inverstment Behavior
AbstractWe discuss some di?culties in a dynamic New-Keynesian model with staggered price setting à la Calvo and a convex capital adjustment cost at the firm level, as considered by Woodford (2003, Ch. 5). It is shown that the implied simultaneous price setting and investment decision has not been analyzed properly. Our work fills that gap by proposing a tractable solution to the key problem of describing the inflation dynamics associated with that structure. We use our framework to assess to what extent capital accumulation matters for inflation and output dynamics. JEL Classification: E22, E31
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2004/01.
Length: 27 pages
Date of creation: 11 Feb 2004
Date of revision:
Sticky Prices; Investments;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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