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Working Paper

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

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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.
12.01.2004ISSN 2573-7953 WP 04-16DOI 10.26509/frbc-wp-200416
Keywords capital, inflation, price behavior
JEL Classification Codes E3, E4, E5

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Altig, David, Lawrence Christiano, Martin Eichenbaum, and Jesper Linde. 2004. “Firm-Specific Capital, Nominal Rigidities, and the Business Cycle.” Federal Reserve Bank of Cleveland, Working Paper No. 04-16. https://doi.org/10.26509/frbc-wp-200416