Evaluating the Role of Firm-Specific Capital in New Keynesian Models

Paper number: 12/04

Year: 2012

Paper Category: Discussion Paper

Authors

Joao Madeira

Abstract

In this paper I make use of Bayesian methods to estimate a …rm-speci…c capital DSGE model with Calvo price and wage setting. This approach allows me to …rmly conclude that …rm-speci…c capital is highly relevant in improving the …t of New Key- nesian models to the data as shown by a large increase in the value of the log marginal data density relative to the more conventional rental capital model. The introduction of …rm-speci…c capital also has important implications for business cycle dynamics lead- ing to increased persistence of aggregate variables and helps reduce the discrepancy between macro estimates of the NKPC and the observed frequent price adjustments in the micro data.

Evaluating the Role of Firm-Specific Capital in New Keynesian Models Evaluating the Role of Firm-Specific Capital in New Keynesian Models