Pitfalls in the Modelling of Forward-Looking Price Setting and Inverstment Behavior

Tommy Sveen () and Lutz Weinke

No 2004/01, Working Paper from Norges Bank

Abstract: We discuss some di?culties in a dynamic New-Keynesian model with staggered price setting à la Calvo and a convex capital adjustment cost at the firm level, as considered by Woodford (2003, Ch. 5). It is shown that the implied simultaneous price setting and investment decision has not been analyzed properly. Our work fills that gap by proposing a tractable solution to the key problem of describing the inflation dynamics associated with that structure. We use our framework to assess to what extent capital accumulation matters for inflation and output dynamics. JEL Classification: E22, E31

Keywords: Sticky Prices; Investments (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-02-11
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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