Journal
REVIEW OF ECONOMIC DYNAMICS
Volume 14, Issue 2, Pages 225-247Publisher
ACADEMIC PRESS INC ELSEVIER SCIENCE
DOI: 10.1016/j.red.2010.01.001
Keywords
Sticky prices and wages; Inflation inertia; Monetary policy shocks; Neutral and investment-specific technology shocks; Structural vector autoregressive (VAR) model
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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. Published by Elsevier Inc.
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