Paper #773

Títol:

Pitfalls in the modeling of forward-looking price setting and investment decisions

Autors:

Tommy Sveen i Lutz Weinke

Data:

Setembre 2004

Resum:

The present paper makes progress in explaining the role of capital for inflation and output dynamics. We followWoodford (2003, Ch. 5) in assuming Calvo pricing combined with a convex capital adjustment cost at the firm level. Our main result is that capital accumulation affects inflation dynamics primarily through its impact on the marginal cost. This mechanism is much simpler than the one implied by the analysis in Woodford's text. The reason is that his analysis suffers from a conceptual mistake, as we show. The latter obscures the economic mechanism through which capital affects inflation and output dynamics in the Calvo model, as discussed in Woodford (2004).

Paraules clau:

Sticky prices, investments

Codis JEL:

E22, E31

Àrea de Recerca:

Macroeconomia i Economia Internacional

Publicat a:

Journal of Monetary Economics
Amb el títol:
Lumpy Investment, Sticky Prices, and the Monetary Transmission Mechanism

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