Working Paper: NBER ID: w11034
Authors: David Altig; Lawrence J. Christiano; Martin Eichenbaum; Jesper Linde
Abstract: 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 pre-determined within a period.
Keywords: Firm-specific capital; Nominal rigidities; Business cycle; Inflation inertia
JEL Codes: E3; E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Firm-specific capital (D25) | Pricing behavior (D40) |
| Pricing behavior (D40) | Aggregate inflation (E31) |
| Marginal cost shocks (E39) | Inflation responses (E31) |
| Monetary policy shocks (E39) | Output response (Y60) |
| Neutral technology shocks (E39) | Productivity (O49) |
| Capital-embodied technology shocks (O49) | Productivity (O49) |
| Estimated model (C51) | Cyclical fluctuations in aggregate output (E32) |