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Lumpy Investment and State-Dependent Pricing in General Equilibrium

  • Reiter, Michael

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

  • Sveen, Tommy

    (Monetary Policy Department, Norges Bank, Oslo, Norway)

  • Weinke, Lutz

    (Department of Economics, Duke University, Durham, NC, USA and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

The lumpy nature of plant-level investment is generally not taken into account in the context of monetary theory (see, e.g., Christiano et al. 2005 and Woodford 2005). We formulate a generalized (S,s) pricing and investment model which is empirically more plausible along that dimension. Surprisingly, our main result shows that the presence of lumpy investment casts doubt on the ability of sticky prices to imply a quantitatively relevant monetary transmission mechanism.

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Paper provided by Institute for Advanced Studies in its series Economics Series with number 239.

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Length: 26 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:ihs:ihsesp:239
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