No. 176. Firm-Specific Capital, Nominal Rigidities and the Business Cycle

by David Altig, Lawrence Christiano, Martin Eichenbaum and Jesper Lindé

Abstract: 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.

Keywords: Technology shocks, Firm-specific capital, Monetary policy, Nominal rigidities, Real rigidities, Business cycles.

JEL Classification: E3, E4, E5.