Firm-specific capital, nominal rigidities and the business cycle

David Altig, Lawrence J. Christiano, Martin Eichenbaum, Jesper Lindé*

*Corresponding author for this work

Research output: Contribution to journalArticle

164 Scopus citations

Abstract

This paper formulates and estimates a three-shock U.S. business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model re-optimize prices on average once every 1.8 quarters. The key feature of our model underlying this result is that capital is firm-specific. If we adopt the standard assumption that capital is homogeneous and traded in economy-wide rental markets, we find that firms re-optimize their prices on average once every 9 quarters. We argue that the micro implications of the model strongly favor the firm-specific capital specification.

Original languageEnglish (US)
Pages (from-to)225-247
Number of pages23
JournalReview of Economic Dynamics
Volume14
Issue number2
DOIs
StatePublished - Apr 1 2011

Keywords

  • Inflation inertia
  • Monetary policy shocks
  • Neutral and investment-specific technology shocks
  • Sticky prices and wages
  • Structural vector autoregressive (VAR) model

ASJC Scopus subject areas

  • Economics and Econometrics

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