Inflation and Output Dynamics with Firm - Specific Investment ∗

This note corrects the analysis given in Woodford (2003, chap. 5) of a model with staggered pricing and endogenous capital accumulation, to take account of an error in the original calculations noted by Sveen and Weinke (2004). The main source of complication in this analysis is the assumption that the producers of individual differentiated goods (that adjust their prices at different dates) invest in firm-specific capital which is relatively durable, so that the distribution of capital stocks across different firms (as a result of differing histories of price adjustment) matters, and not simply the economy’s aggregate capital stock. This additional complications that result from this assumption are worth pursuing, not only because an economy-wide market for the rental of existing capital goods does not exist in practice, but because the non-existence of such a rental market has important implications for the degree of strategic complementarity among the pricing decisions of the producers of different goods, and hence for the speed of aggregate price adjustment, as discussed in Woodford (2003, chaps. 3, 5). ∗I would like to thank Lutz Weinke for calling my attention to a mistake in my previous analysis of this model, and Larry Christiano for helpful discussions.