IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpma/0302003.html
   My bibliography  Save this paper

Do Flexible Durable Goods Prices Undermine Sticky Price Models?

Author

Listed:
  • Robert Barsky

    (The University of Michigan)

  • Christopher House

    (The University of Michigan)

  • Miles Kimball

    (The University of Michigan)

Abstract

The “neoclassical synthesis” sticky price model exhibits strange behavior when augmented with markets for durable goods with flexible prices. While in the data the output of durable goods responds strongly and positively to a loosening of monetary policy, in dynamic general equilibrium models a monetary expansion causes the output of flexibly priced durables to contract. In an instructive special case in which the only sticky prices are those of nondurables, the negative co-movement of durable and nondurable output exactly offsets and the behavior of aggregate output in the model is very similar to that of a model with fully flexible prices. This neutrality result is special, but the perverse response of durables to monetary policy is highly robust. The reason for the co-movement problem is the combination of a naturally high intertemporal elasticity of substitution for the purchases of durables and temporarily high factor prices associated with an economic expansion.

Suggested Citation

  • Robert Barsky & Christopher House & Miles Kimball, 2003. "Do Flexible Durable Goods Prices Undermine Sticky Price Models?," Macroeconomics 0302003, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0302003
    Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 42 ; figures: included
    as

    Download full text from publisher

    File URL: http://econwpa.repec.org/eps/mac/papers/0302/0302003.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher J. Erceg & Andrew T. Levin, 2002. "Optimal monetary policy with durable and non-durable goods," International Finance Discussion Papers 748, Board of Governors of the Federal Reserve System (U.S.).
    2. Matthew D. Shapiro, 1994. "Federal Reserve Policy: Cause and Effect," NBER Chapters,in: Monetary Policy, pages 307-334 National Bureau of Economic Research, Inc.
    3. James Tobin, 1955. "A Dynamic Aggregative Model," Journal of Political Economy, University of Chicago Press, vol. 63, pages 103-103.
    4. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 183-203.
    5. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    6. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
    7. Mark Bils, 1989. "Pricing in a Customer Market," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 699-718.
    8. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    9. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9.
    10. Ohanian, Lee E & Stockman, Alan C & Kilian, Lutz, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1209-1234, November.
    11. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    12. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425.
    13. Leahy, John V, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1237-1240, November.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    sticky-prices durables comovement neutrality;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0302003. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.