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Nominal Rigidities, Monetary Policy and Pigou Cycles

  • Stéphane Auray
  • Paul Gomme
  • Shen Guo

Capturing the boom phase of Pigou cycles and resolving the comovement problem requires positive sectoral comovement. This paper addresses these observations using a two sector New Keynesian model. Price rigidities dampen movements in the relative price of durables following a monetary policy shock. Durables and nondurables are estimated to be complements in utility, allowing for a resolution of the comovement problem for modest degrees of price rigidity. Nominal rigidities also make firms forward-looking in their pricing behaviour which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a Pigou cycle.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): (2013)
Issue (Month): (05)
Pages: 455-473

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Handle: RePEc:ecj:econjl:v::y:2013:i::p:455-473
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