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

• Jean-Pierre Danthine John B Donaldson
20 Apr 2002

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.