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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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Cited by:
  1. repec:van:wpaper:vuecon-sub-13-00002 is not listed on IDEAS
  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. Federico Di Pace & Matthias S. Hertweck, 2012. "Labour Market Frictions, Monetary Policy and Durable Goods," Working Paper Series of the Department of Economics, University of Konstanz 2012-09, Department of Economics, University of Konstanz.
  4. Hashmat Khan & Abeer Reza, 2013. "House Prices, Consumption, and Government Spending Shocks," Carleton Economic Papers 13-10, Carleton University, Department of Economics.

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