DP4858 Firm-Specific Capital, Nominal Rigidities and the Business Cycle

Author(s): David E Altig, Lawrence J. Christiano, Martin Eichenbaum, Jesper Lindé
Publication Date: January 2005
Keyword(s):
JEL(s): E30, E40, E50
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4858

Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model that resolves this apparent micro/macro conflict. Our model is consistent with post-war US 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 pre-determined within a period.