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Firm-specific capital and welfare

Author

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  • Tommy Sveen

    (Norges Bank (Central Bank of Norway))

  • Lutz Weinke

    (Duke University)

Abstract

What are the consequences for monetary policy design implied by the fact that price setting and investment takes typically place simultaneously at the firm level? To address this question we analyze simple (constrained) optimal interest rate rules in the context of a dynamic New Keynesian model featuring firm-speci.c capital accumulation as well as sticky prices and wages à la Calvo. We make the case for Taylor type rules. They are remarkably robust in the sense that their welfare implications do not appear to hinge neither on the speci.c assumptions regarding capital accumulation that are used in their derivation nor on the particular definition of natural output that is used to construct the output gap. On the other hand we find that rules prescribing that the central bank does not react to any measure of real economic activity are not robust in that sense.

Suggested Citation

  • Tommy Sveen & Lutz Weinke, 2006. "Firm-specific capital and welfare," Working Paper 2006/04, Norges Bank.
    • Handle: RePEc:bno:worpap:2006_04
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    References listed on IDEAS

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    Cited by:

    1. Schoder, Christian, 2017. "Are Dynamic Stochastic Disequilibrium models Keynesian or neoclassical?," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 46-63.
    2. Christian Schoder, 2017. "An estimated Dynamic Stochastic Disequilibrium model of Euro-Area unemployment," Working Papers 1725, New School for Social Research, Department of Economics.
    3. Christian Schoder, 2015. "A Keynesian Dynamic Stochastic Labor-Market Disequilibrium model for business cycle analysis," IMK Working Paper 157-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Nelson, Benjamin & Pinter, Gabor, 2018. "Macroprudential capital regulation in general equilibrium," Bank of England working papers 770, Bank of England.
    5. Sveen, Tommy & Weinke, Lutz, 2007. "Firm-specific capital, nominal rigidities, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 136(1), pages 729-737, September.
    6. Rahul Nath, 2018. "Equity Pricing New Keynesian Models with Nominal Rigidities and Investment," Economics Series Working Papers 850, University of Oxford, Department of Economics.

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    More about this item

    Keywords

    Monetary policy; Sticky prices; Aggregate investment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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