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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