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Intertemporal Substitution and Sectoral Comovement in a Sticky Price Model

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  • Munechika Katayama

    ()

  • Kwang Hwan Kim

    ()

Abstract

Strong procyclical fluctuations in the durable production are the most prominent feature of the empirical response to monetary shocks. This paper investigates the role of preferences in matching this feature of the data in a two-sector sticky price model with flexibly priced durables. The reaction of durables depends crucially on whether preferences are separable between labor and aggregate consumption. When preferences are separable, the model exhibits perverse behavior. Flexibly priced durables contract during periods of economic expansion. However, sticky price model with non-separable preferences can replicate the empirically plausible response of durable spending. The key to the model’s success hinges upon the fact that the non-separable preferences imply the complementarity between aggregate consumption and labor supply, absent in the separable preference. Finally, we present empirical evidence supporting the non-separable preferences.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2010-01.

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Handle: RePEc:lsu:lsuwpp:2010-01

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  1. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 69-106, February.
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  3. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1995. "Capital Utilization and Returns to Scale," NBER Working Papers 5125, National Bureau of Economic Research, Inc.
  4. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  5. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, April.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  7. Shapiro, Matthew D, 1993. "Cyclical Productivity and the Workweek of Capital," American Economic Review, American Economic Association, vol. 83(2), pages 229-33, May.
  8. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
  9. Ogaki, M & Reinhart, C-M, 1995. "Measuring Intertemporal Substitution : The Role of Durable Goods," RCER Working Papers 404, University of Rochester - Center for Economic Research (RCER).
  10. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2006. "Housing, Consumption, and Asset Pricing," NBER Working Papers 12036, National Bureau of Economic Research, Inc.
  11. Barro, Robert J. & Sahasakul, Chaipat, 1986. "Average Marginal Tax Rates from Social Security and the Individual Income Tax," Scholarly Articles 3451298, Harvard University Department of Economics.
  12. Bouakez, Hafedh & Cardia, Emanuela & Ruge-Murcia, Francisco J., 2011. "Durable goods, inter-sectoral linkages and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 730-745, May.
  13. Robert Barsky & Christopher L. House & Miles Kimball, 2005. "Sticky Price Models and Durable Goods," Macroeconomics 0501031, EconWPA.
  14. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  15. Bils, Mark & Cho, Jang-Ok, 1994. "Cyclical factor utilization," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 319-354, April.
  16. Erceg, Christopher & Levin, Andrew, 2006. "Optimal monetary policy with durable consumption goods," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1341-1359, October.
  17. Robert Barsky & Christopher L. House & Miles Kimball, 2003. "Do Flexible Durable Goods Prices Undermine Sticky Price Models?," NBER Working Papers 9832, National Bureau of Economic Research, Inc.
  18. Charles T. Carlstrom & Timothy S. Fuerst, 2006. "Co-movement in sticky price models with durable goods," Working Paper 0614, Federal Reserve Bank of Cleveland.
  19. Robert Shimer, 2009. "Convergence in Macroeconomics: The Labor Wedge," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 280-97, January.
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Cited by:
  1. Di Pace, Federico & Hertweck, Matthias S., 2012. "Labour Market Frictions, Monetary Policy, and Durable Goods," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62052, Verein für Socialpolitik / German Economic Association.
  2. Munechika Katayama & Kwang Hwan Kim, . "Costly Labor Reallocation, Non-Separable Preferences, and Expectation Driven Business Cycles," Departmental Working Papers 2010-05, Department of Economics, Louisiana State University.
  3. repec:van:wpaper:vuecon-sub-13-00002 is not listed on IDEAS
  4. repec:car:carecp:13-10 is not listed on IDEAS

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