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Firm-specific capital, nominal rigidities and the business cycle

  • David Altig
  • Lawrence J. Christiano
  • Martin Eichenbaum
  • Jesper Linde

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. 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 predetermined within a period.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-05-01.

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Date of creation: 2004
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Handle: RePEc:fip:fedhwp:wp-05-01
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