Firm-specific capital, inflation persistence and the sources of business cycles

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JournalEuropean economic review
DateE-pub ahead of print - 29 Dec 2014
DatePublished (current) - Feb 2015
Volume74
Number of pages15
Pages (from-to)229-243
Early online date29/12/14
Original languageEnglish

Abstract

This paper estimates a firm-specific capital DSGE model. Firm-specific capital improves the fit of DSGE models to the data (as shown by a large increase in the value of the log marginal likelihood). This results from a lower implied estimate of the NKPC slope for a given degree of price stickiness. Firm-specific capital leads to a better fit to the volatilities of macro variables and a greater persistence of inflation. It is also shown that firm-specific capital reduces the dependence of New Keynesian models on price markup shocks and that it increases the persistence of output to monetary shocks.

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(c) 2014 Elsevier B.V. All rights reserved. This is an author produced version of a paper published in European Economic Review. Uploaded in accordance with the publisher's self-archiving policy.

    Research areas

  • New Keynesian models; Sticky prices; DSGE; Business cycles; Firm-specific capital; Bayesian estimation

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