Firm-specific capital, nominal rigidities, and the business cycle

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

doi:10.26509/frbc-wp-200416

Working Paper

Firm-specific capital, nominal rigidities, and the business cycle

Abstract: 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.

Keywords: Inflation (Finance); Monetary policy; Business cycles;

https://doi.org/10.26509/frbc-wp-200416