DP3351 A Note on NNS Models: Introducing Physical Capital; Avoiding Rationing

Author(s): Jean-Pierre Danthine, John B Donaldson
Publication Date: April 2002
Keyword(s): cost-of-adjusting capital, new neo-classical synthesis, sticky prices
JEL(s): E30, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3351

This note makes two comments on recent NNS models. First, it disputes the way physical capital has been introduced into these models, arguing that this leads to the dubious postulate that the cost of adjusting physical capital stock is an order of magnitude lower than the cost of changing prices. Second, it warns against a possible logical inconsistency whereby calibrated NNS models are implicitly assuming that some (price-constrained) firms are willing and able to sell their output below cost.