June 2009 issue contents
Firm-Specific Capital and Welfare

by Tommy Sveena and Lutz Weinkeb,c


What are the consequences for monetary policy design implied by the fact that price setting and investment typically take place simultaneously at the firm level? To address this question we analyze simple (constrained) optimal interest rate rules in the context of a dynamic New Keynesian model featuring firm-specific capital accumulation as well as sticky prices and wages à la Calvo. We make the case for Taylortype rules. They are remarkably robust in the sense that their welfare implications do appear to hinge neither on the specific assumptions regarding capital accumulation that are used in their derivation nor on the particular definition of natural output that is used to construct the output gap.

JEL Codes: E22, E31, E52.

Full article (PDF, 33 pages 349 kb)

a Monetary Policy Department, Norges Bank
b Department of Economics, Duke University
c Institute for Advanced Studies, Vienna