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: Business cycles; Macroeconomics; Microeconomics;

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    Altig, David E.

    Christiano, Lawrence J.

    Eichenbaum, Martin

    Linde, Jesper

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2004

Number: WP-05-01