New perspectives on capital, sticky prices, and the Taylor principle

Our main result is that dynamic new-Keynesian (DNK) models with firm-specific capital feature a substantial amount of endogenous price stickiness. We use this insight to assess the desirability of alternative interest rate rules, and make the case for combining active monetary policy with interest rate smoothing and/or some responsiveness of the nominal interest rate to real economic activity. The key mechanism behind our results is also useful from a positive point of view: the feature of firmspecific capital increases the empirical appealingness of DNK models, as documented by a growing body of literature. © 2005 Elsevier Inc. All rights reserved. JEL classification: E22; E31