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

Author

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  • Joao Madeira

    (Department of Economics, University of Exeter)

Abstract

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.

Suggested Citation

  • Joao Madeira, 2012. "Evaluating the Role of Firm-Specific Capital in New Keynesian models," Discussion Papers 1204, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:1204
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1204.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    New Keynesian models; sticky prices; DSGE; business cycles; firm-specific capital; Bayesian estimation.;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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