Labour market frictions, monetary policy and durable goods

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 October 2016

Working Paper No. 623
By Federico Di Pace and Matthias Hertweck

This paper provides a quantitative answer to the ‘sectoral comovement puzzle’. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by (i) labour search and matching frictions and (ii) internal habit formation in non-durable consumption. Search and matching frictions generate comovement and increase the persistence of sectoral outputs, whereas habit formation helps to appropriately distribute the impact of a given shock over the two sectors. As a result, our estimated model closely replicates the amplitude and the curvature of the empirical impulse responses in both sectors.

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