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

Joao Madeira

No 1204, Discussion Papers from University of Exeter, Department of Economics

Abstract: In this paper I make use of Bayesian methods to estimate a firm-specific capital DSGE model with Calvo price and wage setting. This approach allows me to firmly conclude that firm-specific capital is highly relevant in improving the fit of New Keynesian 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 firm-specific capital also has important implications for business cycle dynamics leading 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.

Keywords: New Keynesian models; sticky prices; DSGE; business cycles; firm-specific capital; Bayesian estimation. (search for similar items in EconPapers)
JEL-codes: E20 E22 E27 E30 E32 E37 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec and nep-mac
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