Altig, David Christiano, Lawrence Eichenbaum, Martin Lindé, Jesper
Sveriges Riksbank Working Paper Series No. 176
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.
Technology shocks Firm-specific capital Monetary policy Nominal rigidities Real rigidities Business cycles