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Labor Market Frictions, Monetary Policy, and Durable Goods

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  • Federico Di Pace

    (Bank of England)

  • Matthias Hertweck

    (Deutsche Bundesbank)

Abstract

This paper argues that the labor market is key to understanding the “sectoral comovement puzzle†. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by introducing (i) labor search and matching frictions and (ii) internal habit formation in non-durable consumption. Search and matching frictions generate comovement and increase the persistence of sectoral outputs, whereas habit formation helps to appropriately distribute the impact of a monetary contraction over the two sectors. As a result, our estimated model closely replicates the amplitude and the curvature of the empirical impulse responses in both sectors. (Copyright: Elsevier)

Suggested Citation

  • Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.
  • Handle: RePEc:red:issued:18-237
    DOI: 10.1016/j.red.2018.10.003
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    Cited by:

    1. Cantelmo, Alessandro & Melina, Giovanni, 2018. "Monetary policy and the relative price of durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 1-48.
    2. Micheli, Martin, 2015. "Does height affect labor supply? Implications of product variety and caloric needs," Ruhr Economic Papers 566, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    Keywords

    Durable production; Labor market frictions; Sectoral comovement; Monetary policy;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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