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Labour Market Frictions, Monetary Policy and Durable Goods

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  • Federico Di Pace

    ()
    (Department of Economics, University of Warwick, United Kingdom)

  • Matthias S. Hertweck

    ()
    (Department of Economics, University of Konstanz, Germany)

Abstract

The standard two-sector monetary business cycle model suffers from an important deficiency. Since durable good prices are more flexible than non-durable good prices, optimising households build up the stock of durable goods at low cost after a monetary contraction. Consequently, sectoral outputs move in opposite directions. This paper finds that labour market frictions help to understand the so-called sectoral “comovement puzzle”. Our benchmark model with staggered Right-to-Manage wage bargaining closely matches the empirical elasticities of output, employment and hours per worker across sectors. The model with Nash bargaining, in contrast, predicts that firms adjust employment exclusively along the extensive margin.

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Paper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-09.

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Length: 35 pages
Date of creation: 06 Jun 2012
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Handle: RePEc:knz:dpteco:1209

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Keywords: durable production; labour market frictions; sectoral comovement; monetary policy;

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