Working Paper: CEPR ID: DP4858
Authors: David E. Altig; Lawrence Christiano; Martin Eichenbaum; Jesper Lind
Abstract: Macroeconomic and microeconomic data paint conflicting pictures of price behaviour. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model that resolves this apparent micro/macro conflict. Our model is consistent with post-war US 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 pre-determined within a period.
Keywords: Firm-Specific Capital; Nominal Rigidities; Business Cycle
JEL Codes: E30; E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| output (C67) | marginal cost (D40) |
| firm-specific capital (G32) | marginal cost (D40) |
| firm-specific capital (G32) | pricing decisions (L11) |
| inflation inertia (E31) | micro-macro pricing conflict (D49) |
| price changes (P22) | inflation inertia (E31) |