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 in‡ation. This is true even though …rms in the model reoptimize prices on average once every 1.8 quarters. The key feature of our model underlying this result is that capital is …rm-speci…c. If we adopt the standard assumption that capital is homogeneous and traded in economy-wide rental markets, we …nd that …rms reoptimize their prices on average once every 9 quarters. We argue that the micro implications of the model strongly favor the …rm-speci…c capital speci…cation.

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