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Nominal Rigidities, Monetary Policy and Pigou Cycles

  • Stephane Auray

    ()

    (CREST-Ensai, Universite du Littoral Cote d'Opale (EQUIPPE),GREDI and CIRPEE)

  • Paul Gomme

    ()

    (Concordia University and CIREQ)

  • Shen Guo

    ()

    (School of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China)

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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File URL: http://paulgomme.github.io/Pigou-paper.pdf
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Paper provided by Concordia University, Department of Economics in its series Working Papers with number 12006.

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Length: 26 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:crd:wpaper:12006
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