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Firm-Specific Capital, Nominal Rigidities and the Business Cycle

  • Altig, David E
  • Christiano, Lawrence J.
  • Eichenbaum, Martin
  • Lindé, Jesper

Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4858.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4858
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