Working Paper: CEPR ID: DP3351
Authors: Jean-Pierre Danthine; John B. Donaldson
Abstract: This note makes two comments on recent NNS models. First, it disputes the way physical capital has been introduced into these models, arguing that this leads to the dubious postulate that the cost of adjusting physical capital stock is an order of magnitude lower than the cost of changing prices. Second, it warns against a possible logical inconsistency whereby calibrated NNS models are implicitly assuming that some (price-constrained) firms are willing and able to sell their output below cost.
Keywords: cost of adjusting capital; new neoclassical synthesis; sticky prices
JEL Codes: E30; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of physical capital (E22) | cost of adjusting physical capital stock (E22) |
| cost of adjusting physical capital stock (E22) | understanding of firm behavior in terms of capital adjustment and pricing strategies (D21) |
| calibrated NNS models (C45) | logical inconsistency regarding price-constrained firms (D22) |
| logical inconsistency regarding price-constrained firms (D22) | marginal cost of production exceeds price (D41) |