Firm-Specific Capital, Nominal Rigidities And The Business Cycle
This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on average once every 1.8 quarters. The key feature of this model underlying this result is that capital is firm-specific. If the authors adopt the standard assumption that capital is homogeneous and traded in economy-wide rental markets, they find that firms reoptimize their prices on average once every 9 quarters.