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Labour market frictions, monetary policy and durable goods

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  • Di Pace, Frederico

    () (Bank of England)

  • Hertweck, Matthias

    () (University of Konstanz)

Abstract

This paper provides a quantitative answer to the ‘sectoral comovement puzzle’. We extend the two-sector New Keynesian model with flexible durable good prices and sticky non-durable good prices by (i) labour 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 given shock 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.

Suggested Citation

  • Di Pace, Frederico & Hertweck, Matthias, 2016. "Labour market frictions, monetary policy and durable goods," Bank of England working papers 623, Bank of England.
  • Handle: RePEc:boe:boeewp:0623
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    Cited by:

    1. Micheli, Martin, 2015. "Does height affect labor supply? Implications of product variety and caloric needs," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112987, Verein für Socialpolitik / German Economic Association.
    2. 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.

    More about this item

    Keywords

    Durable production; labour 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

    NEP fields

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