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Comovement: it's not a puzzle

  • Riccardo DiCecio

A defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity. Standard models cannot account for this phenomenon. This paper develops and estimates a two-sector dynamic general equilibrium model that can account for this key regularity. My model incorporates three shocks to the economy: monetary policy shocks, neutral technology shocks, and embodied technology shocks in the capital-producing sector. The estimated model is able to account for the response of the US economy to all three shocks. Using this model, I argue that the key friction underlying sectoral comovement is rigidity in nominal wages.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-035.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-035
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