Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution

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Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution

Author Info

Federico di Pace (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We propose an additional solution to the comovement puzzle by developing a two-sector monetary model with housing production and an input-output structure. The model generates comovement between consumption and residential investment for large range of shocks hitting the economy. Consistent with previous work, we find that our model produces highly persistence responses in aggregate consumption, aggregate output and residential investment. We show that the results are highly robust to different policy rule specifications. We find that the lower the labour shares, the higher the relative volatility of residential investment. The model with an IO structure is works under different specifications of the period utility function. We extend the model to allow for wage rigidities and show that our proposed solution can perfectly work alongside previous ones.

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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0807.

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Date of creation: Sep 2008
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Handle: RePEc:bbk:bbkefp:0807

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This paper has been announced in the following NEP Reports:

NEP-ALL-2008-10-21 (All new papers)
NEP-CBA-2008-10-21 (Central Banking)
NEP-DGE-2008-10-21 (Dynamic General Equilibrium)
NEP-MAC-2008-10-21 (Macroeconomics)

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