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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Firm-Specific Capital, Nominal Rigidities and the Business Cycle
David Altig, Lawrence J. Christiano, Martin Eichenbaum, and Jesper Linde
2010-990  (January 2010)

Abstract:  This paper formulates and estimates a three-shock US 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 reoptimize 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 reoptimize their prices on average once every 9 quarters. We argue that the micro implications of the model strongly favor the firm-specific capital specification.

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Last update: February 26, 2010