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Do Flexible Durable Goods Prices Undermine Sticky Price Models?

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Author Info

  • Robert Barsky

    (The University of Michigan)

  • Christopher House

    (The University of Michigan)

  • Miles Kimball

    (The University of Michigan)

Abstract

The “neoclassical synthesis” sticky price model exhibits strange behavior when augmented with markets for durable goods with flexible prices. While in the data the output of durable goods responds strongly and positively to a loosening of monetary policy, in dynamic general equilibrium models a monetary expansion causes the output of flexibly priced durables to contract. In an instructive special case in which the only sticky prices are those of nondurables, the negative co-movement of durable and nondurable output exactly offsets and the behavior of aggregate output in the model is very similar to that of a model with fully flexible prices. This neutrality result is special, but the perverse response of durables to monetary policy is highly robust. The reason for the co-movement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily high factor prices associated with an economic expansion.

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File URL: http://128.118.178.162/eps/mac/papers/0302/0302003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0302003.

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Length: 42 pages
Date of creation: 05 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0302003

Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 42 ; figures: included
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Web page: http://128.118.178.162

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Keywords: sticky-prices durables comovement neutrality;

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References

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  1. Bils, Mark, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 699-718, November.
  2. Ball, Laurence & Romer, David, 1990. "Real Rigidities and the Non-neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 183-203, April.
  3. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
  4. Christopher J. Erceg & Dale W. Henderson & Andrew T. Levin, 1999. "Optimal monetary policy with staggered wage and price contracts," International Finance Discussion Papers 640, Board of Governors of the Federal Reserve System (U.S.).
  5. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
  6. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
  7. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
  8. Miles S. Kimball, 1996. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  9. Lee E. Ohanian & Alan C. Stockman & Lutz Killian, 1994. "The effects of real and monetary shocks in a business cycle model with some sticky prices," Proceedings, Federal Reserve Bank of Cleveland, pages 1209-1240.
  10. Matthew D. Shapiro, 1994. "Federal Reserve Policy: Cause and Effect," NBER Working Papers 4342, National Bureau of Economic Research, Inc.
  11. James Tobin, 1955. "A Dynamic Aggregative Model," Journal of Political Economy, University of Chicago Press, vol. 63, pages 103.
  12. Leahy, John V, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1237-40, November.
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