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Evaluating the Role of Firm-Specific Capital in New Keynesian models

  • Joao Madeira

    (Department of Economics, University of Exeter)

In this paper I make use of Bayesian methods to estimate a firm-specific capital DSGE model with Calvo price and wage setting. This approach allows me to firmly conclude that firm-specific capital is highly relevant in improving the fit of New Keynesian models to the data as shown by a large increase in the value of the log marginal data density relative to the more conventional rental capital model. The introduction of firm-specific capital also has important implications for business cycle dynamics leading to increased persistence of aggregate variables and helps reduce the discrepancy between macro estimates of the NKPC and the observed frequent price adjustments in the micro data.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1204.pdf
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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1204.

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Date of creation: 2012
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Handle: RePEc:exe:wpaper:1204
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