Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26081
Authors: 
Heer, Burkhard
Maußner, Alfred
Year of Publication: 
2007
Series/Report no.: 
CESifo working paper 2036
Abstract: 
In a sticky-price model with labor market search and habit persistence, Walsh (2005) shows that inertia in the interest rate policy helps to reconcile the inflation and output persistence with empirical observations for the US economy. We show that this finding is sensitive with regard to the introduction of capital formation. While we are able to replicate the findings for the inflation inertia in a model with capital adjustment costs and variable capacity utilization, the output response to an interest shock is found to be too large and no longer hump-shaped in this case. In addition we find that the response of output to a technology shock can only be reconciled with empirical findings if either the adjustment of the utilization rate is very costly or there is only a modest amount of nominal rigidity in the economy.
JEL: 
E52
E32
J64
Document Type: 
Working Paper

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