Skip to main content

Firm-Specifc Capital, Nominal Rigidities, and the Business Cycle

12.01.04

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.

JEL Codes: E3, E4, E5

Keywords: capital, inflation, price behavior

Suggested citation: Altig, David, Lawrence Christiano, Martin Eichenbaum, and Jesper Linde, 2004. "Firm-Specifc Capital, Nominal Rigidities, and the Business Cycle," Federal Reserve Bank of Cleveland, Working Paper no. 04-16.

Headlines

  • How Well Does the Cleveland Fed’s Systemic Risk Indicator Predict Stress?

    Ben R. Craig

    A number of financial stress measures were developed after the financial crisis of 2007–2009 in the hope that they could provide regulators with advance warning of conditions that might warrant a corrective response. The Cleveland Fed’s systemic risk indicator is one such measure. This Commentary provides a review of the SRI’s performance from 2001 to 2020 and finds that it has performed well, providing a reliable, valid, and timely signal of elevated levels of financial system stress. Read More

  • Forward Guidance during the Pandemic: Has It Changed the Public’s Expectations?

    Wesley Janson Chengcheng Jia

    In responding to the COVID-19 crisis, the Federal Reserve has both lowered the federal funds rate and provided forward guidance. We study whether the forward guidance given with the April and June 2020 FOMC meetings altered the public’s expectations of future policy rates, GDP growth, and inflation. We find that forward guidance was effective in altering the public’s expectations about future policy rates if it was accompanied by an SEP but not expectations about economic fundamentals. We suggest that the difference might be explained by FOMC statements being interpretable in two different ways and the public not having a dominant view on which interpretation was intended. Read More

  • The CRA Is Important for Underserved Communities, and Your Input Can Help Modernize It

    Susan Schaaf

    The Fed is seeking to modernize the Community Reinvestment Act in a way that significantly expands financial inclusion, and you can have a say in how it’s done. Read More

Upcoming EventsSEE ALL