Evaluating the Role of Firm-Specific Capital in New Keynesian Models
Paper number: 12/04
Paper Category: Discussion Paper
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.