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Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution

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  • Federico di Pace

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

We propose an additional solution to the comovement puzzle by developing a two-sector monetary model with housing production and an input-output structure. The model generates comovement between consumption and residential investment for large range of shocks hitting the economy. Consistent with previous work, we find that our model produces highly persistence responses in aggregate consumption, aggregate output and residential investment. We show that the results are highly robust to different policy rule specifications. We find that the lower the labour shares, the higher the relative volatility of residential investment. The model with an IO structure is works under different specifications of the period utility function. We extend the model to allow for wage rigidities and show that our proposed solution can perfectly work alongside previous ones.

Suggested Citation

  • Federico di Pace, 2008. "Revisiting the Comovement Puzzle: the Input-Output Structure as an Additional Solution," Birkbeck Working Papers in Economics and Finance 0807, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:0807
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    File URL: https://eprints.bbk.ac.uk/id/eprint/7589
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    Cited by:

    1. Federico Di Pace & Christoph Görtz, 2021. "Monetary Policy, Sectoral Comovement and the Credit Channel," CESifo Working Paper Series 9142, CESifo.
    2. Di Pace, Federico & Görtz, Christoph, 2021. "Sectoral comovement, monetary policy and the credit channel," Bank of England working papers 925, Bank of England.
    3. Ivan Petrella & Emiliano Santoro, "undated". "Optimal Monetary Policy with Durable Consumption Goods and Factor Demand Linkages," EPRU Working Paper Series 2009-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised May 2009.

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